Analysis of Foreign Currency Exposure of the New Zealand Stock Market

Abstract

This paper analyses the impact of foreign currency exposure on the value of the New Zealand public listed companies using the New Zealand/US exchange rate and Trade Weighted Index factor return. Augmented market model (Adler and Dumas, 1984; Di Iorio and Faff, 2000; Dominguez and Tesar, 2001) would be employed to study the relationship between exchange rate movements and firm value. Using daily data, we test the following hypotheses in this paper: a) Foreign cu rency exposure is a function of firm’s size and its industry affiliation; b) Foreign currency exposure is a function of financial indicators, such as dividend yield, liquidities and P/E ratio. However, we find very weak and ambiguous evidence for the foreign currency exposure on the value of New Zealand companies.

Keywords: Foreign Currency Exposure, New Zealand

JEL Classification: G14, G15