IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v70y2024i3p1943-1969.html
   My bibliography  Save this article

Digesting FOREXS: Information Transmission Across Asset Classes and Return Predictability

Author

Listed:
  • Joon Woo Bae

    (Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

  • Zhi Da

    (Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

  • Virgilio Zurita

    (Hankamer School of Business, Baylor University, Waco, Texas 76706)

Abstract

We provide novel evidence that equity investors react to currency shocks with a delay. Using the cross-section of currency returns and the relative presence of U.S. firms in foreign economies, we compute a foreign operations-related exchange shock ( FOREXS ) measure. We find FOREXS to predict firms’ future cash flows and stock returns, driving much of the previously documented underreaction to foreign information. An FOREXS -based long-short strategy yields a 6.74% annualized abnormal return. FOREXS predictive power comes from firms’ incomplete hedging and investors’ limited attention, highlighting the challenges involved when processing information from a different asset class.

Suggested Citation

  • Joon Woo Bae & Zhi Da & Virgilio Zurita, 2024. "Digesting FOREXS: Information Transmission Across Asset Classes and Return Predictability," Management Science, INFORMS, vol. 70(3), pages 1943-1969, March.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1943-1969
    DOI: 10.1287/mnsc.2023.4778
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2023.4778
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2023.4778?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1943-1969. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.