Reexamining the Exchange Rate Exposure Puzzle by Classifying Exchange Rate Risks into Two Types

Sammo Kang, Soyoung Kim, Jeong Wook Lee

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

The “exchange rate exposure puzzle” refers to the phenomenon in which the proportion of firms with significant exchange rate exposure tends to be lower than expected figures. Some studies use changes in exchange rate to indicate exchange rate risks relevant to firm value. However, a different measure of exchange rate risks, which is the volatility in exchange rate changes, can also affect the value of firms because exchange rate uncertainty can affect international trade and investments of firms. This study classifies exchange rate risks into two types, namely, changes in exchange rate and the standard deviation of exchange rate changes, and empirically examines exchange rate exposure of firms in 12 countries. The results suggest that the proportion of firms with significant exchange rate exposure increases substantially, and thus, weakens the exchange rate exposure puzzle when we also count the cases in which the standard deviation of exchange rate changes affects stock return significantly.

Original languageEnglish
Pages (from-to)116-133
Number of pages18
JournalGlobal Economic Review
Volume45
Issue number2
DOIs
StatePublished - 2 Apr 2016

Keywords

  • changes in exchange rate
  • Exchange rate exposure
  • exchange rate risk
  • exposure puzzle
  • standard deviation of exchange rate changes
  • stock returns

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