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Using survey data to resolve the exchange risk exposure puzzle: Evidence from U.S. multinational firms

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  • Jongen, R.
  • Muller, A.
  • Verschoor, W.F.C.

Abstract

This paper examines the effect of unexpected exchange rate movements on U.S. shareholder wealth. Empirical results based on a sample of 634 U.S. multinational firms (1) confirm previously reported evidence that the disaggregation of the worldwide trade-weighted U.S. dollar exchange rate index into seven region-specific trade-weighted indices increases the precision and significance of exposure estimates; (2) show that models assuming that changes in spot exchange rates are unanticipated are frequently misspecified and, thus, unable to correctly detect the impact of currency movements on firm value; (3) reveal that forward and survey expectations enable us to distinguish between the effect of ‘realized’ and ‘unexpected’ currency movements; and (4) reveal that investors making pricing and hedging decisions prefer to use the information contained in short-term forward and survey expectation rates to the information included in long-term forecasts.

Suggested Citation

  • Jongen, R. & Muller, A. & Verschoor, W.F.C., 2012. "Using survey data to resolve the exchange risk exposure puzzle: Evidence from U.S. multinational firms," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 148-169.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:2:p:148-169
    DOI: 10.1016/j.jimonfin.2011.10.002
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    6. Michael Frenkel & Matthias Mauch & Jan-Christoph Rülke, 2017. "Forecaster Rationality and Expectation Formation in Foreign Exchange Markets: Do Emerging Markets Differ from Industrialized Economies?," WHU Working Paper Series - Economics Group 17-04, WHU - Otto Beisheim School of Management.
    7. Fabio Parlapiano & Vitali Alexeev & Mardi Dungey, 2017. "Exchange rate risk exposure and the value of European firms," The European Journal of Finance, Taylor & Francis Journals, vol. 23(2), pages 111-129, January.
    8. Hajra Ihsan & Abdul Rashid & Anam Naz, 2018. "Exchange Rate Exposure and Firm Value: An Assessment of Domestic Versus Multinational Firms," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 23(1), pages 51-77, Jan-June.
    9. Chen, Shieh-Liang & Liang, Hao-An, 2014. "Cause mapping of simple and complex marketing strategies," Journal of Business Research, Elsevier, vol. 67(1), pages 2867-2876.
    10. Ekta Sikarwar & Ganesh Kumar Nidugala, 2018. "Effect of Central Bank Intervention in Estimating Exchange Rate Exposure: Evidence from an Emerging Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(1), pages 60-95, April.
    11. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Dynamic expectation formation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 75-97.
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    More about this item

    Keywords

    Exchange risk exposure; Survey-based expectations; Heterogeneity; U.S. multinational firms;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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