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Crossing the lines : the conditional relation between exchange rate exposure and stock returns in emerging and developed markets
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Bartram, Söhnke M. and Bodnar, Gordon M. (2012) Crossing the lines : the conditional relation between exchange rate exposure and stock returns in emerging and developed markets. Journal of International Money and Finance, Vol.31 (No.4). pp. 766-792. doi:10.1016/j.jimonfin.2012.01.011
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Official URL: http://dx.doi.org/10.1016/j.jimonfin.2012.01.011
Abstract
This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 to 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.
| Item Type: | Journal Article | ||||
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| Subjects: | H Social Sciences > HG Finance | ||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Journal or Publication Title: | Journal of International Money and Finance | ||||
| Publisher: | Elsevier BV | ||||
| ISSN: | 0261-5606 | ||||
| Official Date: | June 2012 | ||||
| Dates: |
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| Volume: | Vol.31 | ||||
| Number: | No.4 | ||||
| Page Range: | pp. 766-792 | ||||
| DOI: | 10.1016/j.jimonfin.2012.01.011 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access |
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