The Foreign Exposure of Public Companies Traded on the Tel Aviv Stock Exchange

This paper examines features of the foreign exposure of publicly held nonfinancial companies that are traded on the Tel Aviv Stock Exchange. These companies direct more than half their sales to international markets. As their foreign exposure is liable to serve as a transmission channel through which crises in other countries reach the domestic economy—in both its real and financial aspects—it is important to study it in order to understand the connections between global risks and risks to the domestic capital market and economy. We estimate an International Capital Asset Pricing Model (ICAPM) and use it to explain stocks’ return through (1) a domestic factor representing the Tel Aviv 100 Index (TA-100) and (2) a global factor representing the FTSE All-World Index. We find that the proportion of international sales by a public company as a statistically significant positive effect on the sensitivity of its shares to the global factor in the model: the impact of changes in the global stock index on the share of a TA-100 company that directs all its sales to international markets is 40 percent greater than their effect on a TA-100 company that directs all its sales to the domestic market. Our findings indicate that Israeli investors, including institutional investors, are not only exposed to international markets directly, through their investment in foreign assets, but also indirectly, through their investment in public companies traded on the domestic stock market. Aggregate data show that the indirect equity exposure increases their equity exposure to abroad by about 40 percent.