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Measuring currency exposure with quantile regression

Author

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  • Ding Du

    ()

  • Pin Ng

    ()

  • Xiaobing Zhao

    ()

Abstract

In this paper, we explore an alternative explanation of the exposure puzzle, the missing variable bias in previous studies. We propose to correct the bias with the quantile regression technique invented by Koenker and Bassett (Econometrica 46:33–51, 1978 ). Empirically, as soon as we take into account the missing variable bias as well as time variation in currency exposure, we find that 26 out of 30 or 87 % of the US industry portfolios exhibit significant currency exposure to the Major Currencies Index, and 23 out of 30 or 77 % show significant exposure to the Other Important Trading Partners Index. Our results have important theoretical and practical implications. In terms of theoretical significance, our results strengthen the findings in Francis et al. (J Financ Econ 90:169–196, 2008 ), and suggest that methodological weakness, not hedging, may explain the insignificance of currency risk in previous studies. In terms of practical significance, our results suggest a simple yet efficient approach for managers to estimate currency exposure of their firms. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Ding Du & Pin Ng & Xiaobing Zhao, 2013. "Measuring currency exposure with quantile regression," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 549-566, October.
  • Handle: RePEc:kap:rqfnac:v:41:y:2013:i:3:p:549-566 DOI: 10.1007/s11156-012-0322-z
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    References listed on IDEAS

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    1. Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M., 2008. "Does hedging tell the full story? : Reconciling differences in US aggregate and industry-level exchange rate risk premia," Research Discussion Papers 14/2008, Bank of Finland.
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    3. Aggarwal, Raj & Harper, Joel T., 2010. "Foreign exchange exposure of "domestic" corporations," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1619-1636, December.
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    9. Bartram, Söhnke M. & Brown, Gregory W. & Minton, Bernadette A., 2010. "Resolving the exposure puzzle: The many facets of exchange rate exposure," Journal of Financial Economics, Elsevier, vol. 95(2), pages 148-173, February.
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    17. Bartram, Sohnke M., 2004. "Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 673-699, June.
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    Cited by:

    1. Suder, Gabriele & Liesch, Peter W. & Inomata, Satoshi & Mihailova, Irina & Meng, Bo, 2015. "The evolving geography of production hubs and regional value chains across East Asia: Trade in value-added," Journal of World Business, Elsevier, pages 404-416.

    More about this item

    Keywords

    Currency exposure; Missing variable bias; Exposure puzzle; Quantile regression; G15; F31;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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