Exchange Rate Exposure at the Firm and Industry Level
John A. Doukas, Patricia H. Hall and Larry H. P. Lang*
June 2001
ABSTRACT
Previous work on the exposure of firms to exchange rate risk has primarily focused on U.S. firms and, surprisingly, found
stock returns were not significantly affected by exchange-rate fluctuations. The equity market premium for exposure to
currency risk was also found to be insignificant. In this paper we examine the relation between Japanese stock returns
and unanticipated exchange-rate changes for 1079 firms traded on the Tokyo stock exchange over the 1975-1995 period.
Second, we investigate whether exchange-rate risk is priced in the equity market of Japan using both unconditional and
conditional multifactor asset pricing testing procedures. We find a significant relation between contemporaneous stock
returns and unanticipated yen fluctuations. The exposure effect on multinationals and high-exporting firms, however, is
found to be greater in comparison to low-exporting and domestic firms. Lagged-exchange rate changes on firm value are
found to be statistically insignificant implying that investors are able to assess the impact of exchange-rate changes on
firm value with no significant delay. The industry level analysis corroborates the cross-sectional findings for Japanese
firms in that they are sensitive to contemporaneous unexpected exchange-rate fluctuations. The co-movement between
stock returns and changes in the foreign value of the yen is found to be positively associated with the degree of the
firm’s foreign economic involvement and inversely related to its size and debt to asset ratio. Asset pricing tests show
that currency risk is priced. We find corroborating evidence in support of the view that currency exposure is time varying
Our results indicate that the foreign exchange-rate risk premium is a significant component of Japanese stock returns. The
combined evidence from the currency exposure and asset pricing analyses, suggests that currency risk is of hedging
concern to investors with implications for corporate and portfolio management.