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A three-factor model investigation of foreign exchange-rate exposure

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  • Huffman, Stephen P.
  • Makar, Stephen D.
  • Beyer, Scott B.

Abstract

We investigate the likelihood of extreme foreign exchange-rate exposure (FXE), conditioning upon key firm factors and an expanded view of hedging. Our investigation incorporates the Fama and French (1993) three-factor (FF three-factor) model terms in reconciling equity returns vis-à-vis exchange-rate exposure. Our results suggest the following conclusions. First, consistent with effective hedging, non-hedging firms tend to have greater FXE than hedging firms. Second, all key factors that explain the likelihood of high FXE are economically and statistically significant using the more complete FF three-factor model. Third, we note that firm size is important in explaining FXE. Fourth, we find more FXE coefficients that are significant using the FF three-factor model compared to the traditional market model.

Suggested Citation

  • Huffman, Stephen P. & Makar, Stephen D. & Beyer, Scott B., 2010. "A three-factor model investigation of foreign exchange-rate exposure," Global Finance Journal, Elsevier, vol. 21(1), pages 1-12.
  • Handle: RePEc:eee:glofin:v:21:y:2010:i:1:p:1-12
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    Cited by:

    1. Bo Tang, 2015. "Exchange Rate Exposure of Chinese Firms at the Industry and Firm Level," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 592-607, August.
    2. Serkan Yilmaz Kandir & Ahmet Erismis, 2010. "Investigating Exchange Rate Exposure of Bank Shares: Empirical Evidence From ISE," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(46), pages 49-83.

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    Keywords

    Exchange-rate risk Hedging;

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