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The effect of exchange rate fluctuations on multinationals' returns

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This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. nonfinancial multinationals. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases the number of significantly exposed firms in a simple Jorion (1990) regression by 60 percent. Then separating crisis from non-crisis months we find additional evidence of exposure. Although the value of exposure does not change with the size of the exchange rate movement, we find some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates. All told, we find about 1 in 4 firms' returns is significantly affected by movement in the exchange rate between 1995 and 1999.

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  • Jane E. Ihrig & David Prior, 2003. "The effect of exchange rate fluctuations on multinationals' returns," International Finance Discussion Papers 782, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:782
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    Cited by:

    1. Fang Cai & Francis E. Warnock, 2004. "International diversification at home and abroad," International Finance Discussion Papers 793, Board of Governors of the Federal Reserve System (U.S.).
    2. Dewenter, Kathryn L. & Higgins, Robert C. & Simin, Timothy T., 2005. "Can event study methods solve the currency exposure puzzle?," Pacific-Basin Finance Journal, Elsevier, vol. 13(2), pages 119-144, March.

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