Does Hedging Tell the Full Story? Reconciling Differences in US Aggregate and Industry-Level Exchange Rate Risk Premia

61 Pages Posted: 28 May 2008

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Delroy M. Hunter

University of South Florida

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

JEL Classification: C3, F3, F4, G3

Suggested Citation

Francis, Bill B. and Hasan, Iftekhar and Hunter, Delroy M., Does Hedging Tell the Full Story? Reconciling Differences in US Aggregate and Industry-Level Exchange Rate Risk Premia. Bank of Finland Research Discussion Paper No. 14/2008, Available at SSRN: https://ssrn.com/abstract=1138148 or http://dx.doi.org/10.2139/ssrn.1138148

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Delroy M. Hunter

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
813-974-6319 (Phone)

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