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The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures

  • Sohnke M. Bartram

    (Lancaster University)

  • G. Andrew Karolyi

    (Ohio State University)

This paper examines whether the introduction of the Euro in 1999 was associated with lower stock return volatility, market risk exposures and foreign exchange rate risk exposures for 12,821 nonfinancial firms in Europe, the United States, and Japan. We show that though the Euro led to a significant decrease in the volatility of trade-weighted exchange rates of European countries, stock return variances of nonfinancial firms increased after its introduction. However, the Euro was also accompanied by significant reductions in market risk exposures for nonfinancial firms in and outside of Europe. We show that the reduction in market risk was not as a result of changes in financial leverage, and that it is concentrated in firms with a high fraction of foreign sales in Europe, a high fraction of total foreign sales and larger market capitalizations. In addition to its impact on market betas, the Euro has a positive effect on the incremental foreign exchange rate exposures, particularly for multinationals.

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Paper provided by EconWPA in its series Finance with number 0207005.

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Date of creation: 16 Aug 2002
Date of revision: 16 Sep 2002
Handle: RePEc:wpa:wuwpfi:0207005
Note: Ohio State University, Dice Center for Research in Financial Economics, Working paper No. 2003-19
Contact details of provider: Web page: http://econwpa.repec.org

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