Exchange Rate Risk Exposure Of The U.s. Industry

The purpose of this paper is to analyze the effects of exchange rate movements on the industry returns and attempt to link the estimated exposure coefficients with the industry-specific characteristics. The measurement of exchange rate exposure includes 35 industry portfolios in a sample of US markets from first quarter of 1974 to the last quarter in 2007.A major achievement of this paper is the use of the industry-specific exchange rate to measure the sensitivity of stock returns to the exchange rate risk at industry level by an augmented market model, the results record a significant fraction of exchange rate exposure, over 22.8 per cent industry portfolios exhibit a significant exposure at 10 per cent level; this confirmed the suspicion that aggregated exchange rate is an important reason why earlier studies fail to document strong evidence. For the reason that the model specifications have remarkable effects on the measurement of exposure; different tests of robustness of the estimations are performed. The evidence implies exchange rate exposures vary over time and the stock returns react asymmetrically to the appreciation and depreciation of US dollars.Given these results, the determinants of exchange-rate exposure are examined next. By specifying the exposure coefficients as a linearized function of industry characteristics, which contain the international linkages, industry affiliation and structure for the test of how much fraction of industries being likely to exposed; and export, import and foreign assets for the measurement of the direction of exposures. The results suggest that the variation in exchange risk sensitivity is systematically linked to the activities that the specific industry undertakes.