عبور از خط : رابطه شرطی بین مواجهه نرخ ارز و بازده سهام در بازارهای در حال ظهور و توسعه یافته

This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 to 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.

Even though financial theory predicts sizable foreign exchange rate exposures for many firms, a large literature has documented that empirically the impact of exchange rate risk on stock returns is economically and statistically small in almost any sample.2 While it might be possible to reconcile the empirical evidence with predictions from theory by considering various forms of corporate hedging that reduce large gross exposures of firms to levels that are small on an after-hedging basis, the question remains whether empirical estimates of exchange rate exposures are, despite being small, still economically meaningful and useful for investors in financial markets. In this paper we address this issue. To this end, we argue and show that tests of the relation between stock returns and exchange rate exposure are fraught with similar problems revealed by Pettengill et al. (1995) and Lakonishok and Shapiro (1984) with regards to the conditional relation between stock returns and market betas. Tests of the relation between market betas and future returns postulate ex ante a positive, unconditional relation between expected returns and market betas. However, these papers propose that the relation between realized returns and market betas is segmented, i.e. positive in periods of positive market excess returns and negative in periods of negative market excess returns. This conditional relation entails that market betas may not show a significant relation with returns in standard Fama and MacBeth (1973) regressions since the existence of a large number of periods with negative market excess returns biases test of a positive unconditional relation between market betas and returns against finding a systematic relationship. Since positive and negative exchange rate changes occur with roughly the same frequency and since the average currency premium is close to zero, empirical tests are even more biased against finding a positive unconditional relation than for market betas. Consequently, we argue that the relation between stock returns and exchange rate exposure should be examined conditional on the realization of the exchange rate change, i.e. positive for local currency depreciations and negative for local currency appreciations, while the unconditional relation is likely insignificant on average, just as for market betas. We test these predictions of the relation between exchange rate exposure and stock returns for a large sample of non-financial firms from 37 countries, both developed and emerging. In line with our predictions, we fail to find an unconditional relation between stock returns and ex-ante exposure suggesting the lack of a relation between exposure and expected return, but document a conditional relation that is a direct function of the realization of the exchange rate factor, suggesting that exchange rate exposures matters for realized returns. The economic magnitude of this conditional return impact per unit of exposure is significant, averaging 3.3% (annual) for local currency depreciations and −1.2% (annual) for local currency appreciations across all firms in all countries. The magnitude is larger for firms in the emerging markets compared to developed markets, and it is robust to a number of variations in methodology and sample definitions (e.g., it persists even after excluding the effects of financial crises that some of these countries experienced, excluding periods of fixed exchange rates (such as the Euro for some countries), excluding the United States as the country with the largest number of firms in the sample, and using local or global market indices as control variables). We verify that exchange rate exposure and the realized exchange rate are driving this conditional return pattern by modeling the relation of exposure with return as being directly proportional to the realized change in the exchange rate in each country. At the same time, we also model the impact of the market beta on return as being directly proportional to the realized change in the market portfolio in each country. The results indicate that the return impact from both the exchange rate exposure and market betas are significant conditional on the realization of these factors. However, the return impact of exchange rate exposure per unit of exchange rate change is only about 15% as large as the return impact of market exposure per unit of market portfolio change. The important insight from our paper is that while previously the literature has lamented that estimates for foreign exchange rate exposures of firms are economically and statistically surprisingly small and the fact that individual time-series results are noisy and many exposures are not statistically different from zero, we show that the ordering of firm returns by exposure estimates is still economically meaningful when conditioned on the realized change in the exchange rate. However, this effect is substantially less important than the role that market betas play in explaining realized returns. If exchange rate exposures were pure noise without any economic information content, the documented empirical relationships would not exist. We illustrate this in one of many robustness tests detailed later in the paper, where we replace observed exchange rate changes by realizations of variables that have the same statistical properties as actual exchange rate changes but that are generated randomly. The exposures estimated for these random variables have no economic meaning, and consequently we do not find any association, conditional or unconditional, with stock returns, as one would expect. Moreover, the results from Fama–MacBeth regressions can also be shown by simply sorting stocks into portfolios on the basis of their foreign exchange rate exposure estimates, illustrating a positive (negative) relation between exchange rate exposure and stock returns for local currency depreciations (appreciations). Thus, overall, our results demonstrate that exchange rate exposure does play a significant role in the return generating process and that the ordering of estimates of foreign exchange exposures is economically meaningful, despite them being economically and statistically small.3 In our analysis of the importance of exchange rate exposure in the firm-level stock return generating process, we run (rolling) regressions to estimate exposures to local currency depreciations for individual firms over the previous 60 months.4 Following standard Fama and MacBeth (1973) methodology, we relate these exposure estimates (along with the firms' exposures to the local or world market portfolio) to the firms' realized returns in the subsequent month via a cross-sectional regression to obtain an average return impact per unit of exchange rate exposure for that month. This process is repeated each month for the remainder of the sample period and the monthly return impact estimates are averaged over time. Using this common approach we find no evidence that the ex-ante exposure of firms to exchange rates has any relation to their ex-post realized return in the subsequent period. Because of the random behavior of exchange rates and their direct and indirect impact on the valuation of a firm's activities, we argue that in order to examine the role of exchange rate exposure in the stock return generating process, the relation between exchange rate exposure and subsequent returns must be looked at conditionally based upon how the exchange rate changes. Theoretically, the relation between a firm's exposure (to local currency depreciation) and its future stock price performance should be positive when the local currency depreciates, but negative when the local currency appreciates. Since local currency appreciations and depreciations occur with close to equal probability over the sample period, it is not surprising that the average effect of the exchange rate on returns at the firm-level is close to zero. This conditional response suggests a set of oppositely sloped relations between firm returns and exchange rate exposures, one for local currency appreciations and one for local currency depreciations. We document the existence of such a pattern of a conditional relation between exchange rate exposure and realized returns in our data.5 To measure the economic magnitude of this exchange rate return impact, we examine returns to portfolios sorted on the basis of the estimated exchange rate exposures. We document a significant monotonic relation between the returns of these portfolios conditional on the change in the exchange rate. Similar to the approach used in Doidge et al. (2006) we form zero-investment portfolios on the basis of going long the extreme positive exposure quintile and short the extreme negative exposure quintile and find that the returns to these portfolios are significantly positive when the local currency depreciates and negative when the local currency appreciates. Normalizing these portfolio returns by their net exchange rate exposure provides a crude estimate of the return impact per unit of exposure to the average local currency depreciation or appreciation. This unit return impact is 3.3% (annual) for local currency depreciations and −1.2% (annual) for local currency appreciations. Differences in the level of financial market depth and breadth as well as more extreme characteristics of exchange rate variables suggest that there may be differences in these return premia between firms in emerging market countries and developed market countries. As a result, we re-estimate our tests separately for firms in developed markets and firms in emerging markets. As expected, there is a notable difference in results between these two samples. The conditional relation between returns and exchange rate exposure for firms in the emerging markets is larger and more significant than for firms in developed markets. In both samples, the exchange rate return premia are significantly related to the exposure interacted with the realized exchange rate change. Looking at the exposure sorted portfolios, the conditional return premia on the exchange rate for the emerging market firms are much larger than the premia estimated for the full sample, at 8.0% (annual) per unit of exposure for local currency depreciations and −5.5% (annual) for local currency appreciations. For the developed market firms, the exchange rate premia are smaller in magnitude and only significant for local currency depreciations, at 2.3% (annual) per unit of exposure. These results document that across a large sample of countries, individual firms experience a significant return impact to their exchange rate exposure. We show that there is significant conditional variation in this relation that is directly proportional to the firms' exchange rate exposure and the realized change in the exchange rate over the period. Thus while at the firm-level exchange rate exposure has an unconditional return impact of zero, this result is really an average of significant and variable return impacts arising directly from exchange rate exposure and the stochastic behavior of exchange rate changes over time. An interesting question is whether this conditional return impact is a conditional risk premium (a conditional change in the required rate of return) or just a conditional shock to realized returns through the impact of exchange rate changes on the firms' current and expected future cash flows. We show – analytically and with simulations – that the cash flow channel would predict a time-varying relation between exposure and return that is directly related to the subsequent realization of the exchange rate, which is consistent with the empirical results above. In contrast, an exchange rate effect on firm value through the discount rate would lead to a relation between exchange rate movements and required returns opposite to what we observe. As a result, we conclude that the effect of exchange rate changes on stock returns must predominantly, if not exclusively, be an effect on the cash flows of a firm. The remainder of the paper is organized as follows. Section 2 reviews the relevant literature. Section 3 describes the hypotheses, methodology, data sources and sample. In Section 4, we present the results of the empirical investigation. Section 5 discusses the issue of currency risk in international financial markets more generally, while Section 6 concludes.

While a large bodyof researchhas focused on estimatingexchange rateexposures, with attention to either the percentage that are statistically signi fi cant and/or attempting to explain their cross-sectional variation, little attention has been given to the importance of exchange rate exposure for the stock return generating process. This paper offers a comprehensive study of the relation between foreign exchange rate exposures and stock returns based on a large sample of non- fi nancial fi rms from 37 countries around the world including the United States. The analysis is motivated by the observation that the existing literature has often perceived it as surprising that the stock returns of only few non- fi nancial fi rms are affected byexchange rates and that there is little evidence onwhetherexchange rate changes have a systematic effect on returns, and if so how large this effect is. Theresultssuggestthattherearenoticeabledifferencesintheeffectofexchangeratesonthereturns of fi rms across countries. In particular, 30 – 40% of fi rms in open and emerging market countries such as Brazil, South Africa, Indonesia, Argentina and Thailand are signi fi cantly exposed to foreign exchange rate risk. More importantly, we document that while there does not appear to exist an unconditional relation between exchange rate exposure and stock returns, such a relation does exist on a conditional basis, where the conditioning variable is the realized change in the exchange rate itself. The economic magnitude of this relation is signi fi cant, ranging from just over 1 – 3% per unit of exposure for local currency appreciations and depreciations respectively. The relation is more signi fi cant amongst emerging market fi rms, but present to a lesser degree for fi rm in developed markets as well (especiallyforlocalcurrencydepreciations).Theaveragereturnimpactinemergingmarketsisnearly8%perunitof exposure for local currency depreciations and 5.5% per unit of exposure for local currency apprecia- tions. For developed markets, the return impact averages only 2.5% per unit of exposure for local currency depreciations and is not signi fi cantly apparent for local currency appreciations. Given the increasing trend of globalization of business activities, these results have important implications for asset pricing, corporate fi nance and risk management. They suggest that investors should be cognizant of the fact that exchange rates are an important risk factor for fi rms and that this risk factor translates into non-trivial conditional return premia in most cases. While exchange rate changes are close to random, the impact of exchange rates on fi rm returns is unconditionally close to zero. However, the estimates of exchange rate exposure and the realization of the exchange rate index have consistent and predictable impacts on returns. From an economics standpoint, the paper demonstrates thatexchange rateexposure is animportant, systematic variable inthe return generating process. While the impact of exchange rates on returns could in principle stem from an effect on the fi rms ’ cash fl ows or discount rate, we show that the effect of exchange rate risk on stock returns must predominantly, if not exclusively, be an effect on the cash fl ows of a fi rm.