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Does hedging tell the full story? Reconciling differences in US aggregate and industry-level exchange rate risk premia

  • Francis, Bill B

    ()

    (Lally School of Management, Rensselaer Polytechnic Institute)

  • Hasan, Iftekhar

    ()

    (Rensselaer Polytechnic Institute and Bank of Finland Research)

  • Hunter, Delroy M

    ()

    (College of Business, University of South Florida)

While the importance of currency movements to industry competitiveness is theoretically well established, there is little evidence that currency risk impacts US industries. Applying a conditional asset-pricing model to 36 US industries, we find that all industries have a significant currency premium that adds about 2.47 percentage points to the cost of equity and accounts for approximately 11.7% of the absolute value of total risk premia. Cross-industry variation in the currency premium is explained by foreign income, industry competitiveness, leverage, liquidity and other industry characteristics, while its time variation is explained by US aggregate foreign trade, monetary policy, growth opportunities and other macro variables. The results indicate that methodological weakness, not hedging, explains the insignificant industry currency risk premium found in previous work, thus resolving the conundrum that the currency risk premium is important at the aggregate stock market level, but not at industry level.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0814netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 14/2008.

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Length: 58 pages
Date of creation: 27 May 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_014
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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