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The Exchange Rate Exposure of U.S. and Japanese Banking Institutions

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  • Sandra L. Chamberlain
  • John S. Howe
  • Helen Popper
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    Abstract

    In this paper, we examine the foreign exchange exposure of a sample of U. S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/96/9655.pdf
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    Bibliographic Info

    Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 96-55.

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    Date of creation: Jul 1996
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    Handle: RePEc:wop:pennin:96-55

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    Keywords: Foreign Exchange Risk; Banking; Market Risk;

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    References

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    1. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
    2. Bartov, Eli & Bodnar, Gordon M, 1994. " Firm Valuation, Earnings Expectations, and the Exchange-Rate Exposure Effect," Journal of Finance, American Finance Association, vol. 49(5), pages 1755-85, December.
    3. John Ammer & Allan D. Brunner, 1994. "Are banks market timers or market makers? Explaining foreign exchange trading profits," International Finance Discussion Papers 484, Board of Governors of the Federal Reserve System (U.S.).
    4. Gary Gorton & Richard Rosen, . "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 06-95, Wharton School Rodney L. White Center for Financial Research.
      • Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc.
    5. Michael P. Leahy, 1994. "Bank positions and forecasts of exchange rate movements," International Finance Discussion Papers 486, Board of Governors of the Federal Reserve System (U.S.).
    6. Choi, Jongmoo Jay & Elyasiani, Elyas & Kopecky, Kenneth J., 1992. "The sensitivity of bank stock returns to market, interest and exchange rate risks," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 983-1004, September.
    7. Mark E. Levonian, 1994. "Bank capital standards for foreign exchange and other market risks," Economic Review, Federal Reserve Bank of San Francisco, pages 3-18.
    8. Grammatikos, Theoharry & Saunders, Anthony & Swary, Itzhak, 1986. " Returns and Risks of U.S. Bank Foreign Currency Activities," Journal of Finance, American Finance Association, vol. 41(3), pages 671-82, July.
    9. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    10. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
    11. Kenneth A. Froot, 1993. "Currency Hedging over Long Horizons," NBER Working Papers 4355, National Bureau of Economic Research, Inc.
    12. Meese, Richard, 1990. "Currency Fluctuations in the Post-Bretton Woods Era," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 117-34, Winter.
    13. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
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    Cited by:
    1. José Eduardo Gómez Gónzlaez & Jorge Mario Uribe Gil & Hernán Piñeros Gordo, 2009. "Determinantes de la Rentabilidad de los Bancos en Colombia: ¿Importa la Tasa de Cambio?," BORRADORES DE ECONOMIA 005405, BANCO DE LA REPÚBLICA.

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