
The Library
The foreign exchange exposure puzzle
Tools
Bartram, Söhnke M. and Bodnar, Gordon M. (2007) The foreign exchange exposure puzzle. Managerial Finance, 33 (9). pp. 642-666. doi:10.1108/03074350710776226 ISSN 0307-4358.
Research output not available from this repository.
Request-a-Copy directly from author or use local Library Get it For Me service.
Official URL: http://dx.doi.org/10.1108/03074350710776226
Abstract
Purpose
– Based on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the empirical research on nonfinancial firms typically produces fewer significant exposures estimates than researchers expect, independent of the sample studied and the methodology used, giving rise to a situation known as “the exposure puzzle”. To this end, this paper aims to systematically analyze the existing empirical evidence of the exposure phenomenon and to attempt to understand the possible source of the exposure puzzle.
Design/methodology/approach
– The paper provides a survey of the existing research on the exposure phenomenon for nonfinancial firms. A simple model of exposure elasticity is also used to demonstrate the substantial impact of operational hedging on exposure elasticities. Furthermore, the evidence on the nature of firms’ financial derivative usage is considered.
Findings
– It is suggested that the exposure puzzle may not be a problem of empirical methodology or sample selection as previous research has suggested, but is simply the result of the endogeneity of operative and financial hedging at the firm level. Given that empirical tests estimate exchange exposures net of corporate hedging, both firms with low gross exposures that do not need to hedge and firms with large gross exposures that employ one or several forms of hedging, may exhibit only weak exchange rate exposures net of hedging. Consequently, empirical tests yield only small percentages of firms with significant stock price exposures in almost any sample.
Originality/value
– If firms react rationally to their exposures, most firms will either have no exposure to start with, or reduce their exposure to levels that may be too small to detect empirically. Consequently, the exposure puzzle may not be a problem with methodology or theory, but mainly the result of endogeneity of operative and financial hedging at the firm level.
Item Type: | Journal Article | ||||
---|---|---|---|---|---|
Divisions: | Faculty of Social Sciences > Warwick Business School | ||||
Journal or Publication Title: | Managerial Finance | ||||
Publisher: | Emerald Group Pub | ||||
ISSN: | 0307-4358 | ||||
Official Date: | 2007 | ||||
Dates: |
|
||||
Volume: | 33 | ||||
Number: | 9 | ||||
Page Range: | pp. 642-666 | ||||
DOI: | 10.1108/03074350710776226 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
Request changes or add full text files to a record
Repository staff actions (login required)
![]() |
View Item |