Research Discussion Papers, Bank of Finland
No 14/2008:
Does hedging tell the full story? Reconciling differences in US aggregate and industry-level exchange rate risk premia
Bill B Francis ()
, Iftekhar Hasan ()
and Delroy M Hunter ()
Abstract: While the importance of currency movements to industry
competitiveness is theoretically well established, there is little evidence
that currency risk impacts US industries. Applying a conditional
asset-pricing model to 36 US industries, we find that all industries have a
significant currency premium that adds about 2.47 percentage points to the
cost of equity and accounts for approximately 11.7% of the absolute value
of total risk premia. Cross-industry variation in the currency premium is
explained by foreign income, industry competitiveness, leverage, liquidity
and other industry characteristics, while its time variation is explained
by US aggregate foreign trade, monetary policy, growth opportunities and
other macro variables. The results indicate that methodological weakness,
not hedging, explains the insignificant industry currency risk premium
found in previous work, thus resolving the conundrum that the currency risk
premium is important at the aggregate stock market level, but not at
industry level.
Keywords: exposure; currency risk premium; cost of equity; industry competition; international asset pricing; (follow links to similar papers)
JEL-Codes: C30; F30; F40; G30; (follow links to similar papers)
58 pages, May 27, 2008
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