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A three-factor model investigation of foreign exchange-rate exposure

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  • Huffman, Stephen P.
  • Makar, Stephen D.
  • Beyer, Scott B.

Abstract

We investigate the likelihood of extreme foreign exchange-rate exposure (FXE), conditioning upon key firm factors and an expanded view of hedging. Our investigation incorporates the Fama and French (1993) three-factor (FF three-factor) model terms in reconciling equity returns vis-à-vis exchange-rate exposure. Our results suggest the following conclusions. First, consistent with effective hedging, non-hedging firms tend to have greater FXE than hedging firms. Second, all key factors that explain the likelihood of high FXE are economically and statistically significant using the more complete FF three-factor model. Third, we note that firm size is important in explaining FXE. Fourth, we find more FXE coefficients that are significant using the FF three-factor model compared to the traditional market model.

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  • Huffman, Stephen P. & Makar, Stephen D. & Beyer, Scott B., 2010. "A three-factor model investigation of foreign exchange-rate exposure," Global Finance Journal, Elsevier, vol. 21(1), pages 1-12.
    • Handle: RePEc:eee:glofin:v:21:y:2010:i:1:p:1-12
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    6. Ibrahim Ethem Guney & Abdullah Kazdal & Doruk Kucuksarac & Muhammed Hasan Yilmaz, 2019. "Exchange Rate Sensitivity of Firm Value : Recent Evidence from Non-Financial Firms Listed on Borsa Istanbul," CBT Research Notes in Economics 1911, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    7. Serkan Yilmaz Kandir & Ahmet Erismis, 2010. "Investigating Exchange Rate Exposure of Bank Shares: Empirical Evidence From ISE," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(46), pages 49-83.
    8. Bo Tang, 2019. "Does the currency exposure affect stock returns of Chinese automobile firms?," Empirical Economics, Springer, vol. 57(1), pages 53-77, July.
    9. Fuchs, Fabian U., 2020. "Macroeconomic determinants of foreign exchange rate exposure," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-42-20, University of Passau, Faculty of Business and Economics.
    10. Cuestas, Juan Carlos & Huang, Ying Sophie & Tang, Bo, 2018. "Does internationalisation increase exchange rate exposure? -Evidence from Chinese financial firms," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 253-263.
    11. Augustine C. Arize & Giuliana Campanelli Andreopoulos & Ioannis N. Kallianiotis & John Malindretos, 2018. "MNC Transactions Foreign Exchange Exposure: An Application," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 54-60.
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