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during a visit of the first author at the Fisher College of
Business (Ohio State University). The warm hospitality and support of the Charles A. Dice
Center for Research in Financial Economics as well as funding by the German Academic
Exchange Service during this stay are gratefully acknowledged. Furthermore, support by the
German National Merit Foundation is appreciated.
Exchange rate
exposure puzzle
643
tends to be only about twice the chosen level of statistical significance. This
phenomenon is presented as being inconsistent with researchers’ priors and has given
rise to the term ‘‘exposure puzzle’’. To this end, this paper systematically analyzes the
existing empirical evidence of the exposure phenomenon and attempts to understand
the possible source of the exposure puzzle[1].
The literature on exchange rate exposures has largely focused on attempting to
solve the exposure puzzle on the basis of shortcomings in the way exchange rate
exposures are estimated. The existing empirical studies cover a wide variety of
approaches both in terms of the selectivity of the firms (targeted subsamples vs entire
populations), https://www.51lunwen.org/the level of analysis (individual firms vs industry portfolios), and the
geographic coverage (single country vs multi-countries). The studies also vary in terms
of their model construction, primarily in the choice of the dependent variable but also
in terms of the control variables, the choice of the measure for exchange rates, and the
data/return frequency. The methodological approaches considered to explain the
exposure puzzle include the possibility of time variation in the exposure estimate,
lagged exposures rather than purely contemporaneous exposure effects, altering the
return horizon over which the exposure is estimated, and allowing for nonlinear
exposures. While each of these has been shown to be a legitimate problem of the
standard simple linear exposure model using monthly returns, these modifications in
general do not appear to be able to satisfactorily explain the low number of firms with
significant exposures to foreign exchange rate risk. Our review of this research
suggests that a majority of these studies still find significant exposures in just 10-25
per cent of the cases (with marginally higher percentages for firms in open, exportoriented
economies and nonlinear exposures), a level that still appears to be below the
prior expectations of the researchers based upon theoretical and anecdotal predictions.
To be clear, this paper in no way suggests that exposure is a non-event. Despite the
low levels of significance, a large number of studies demonstrate that exchange rate
exposures are related to measures of international business (primarily the percentage
of foreign sales), firm size, firm liquidity, as well as industry sectors in a manner that is
consistent with the predictions of financial theory. There is also a relationship between
the volatility of exchange rates and stock prices that is in line with exchange rate
exposure. It is clear that exchange rate exposure is real, statistically significant and
consistent with the predictions of financial theory for some firms, just not for as large a
percentage of firms as suggested by the researchers’ priors. The general tone of most
papers has been that something remains amiss, hence the issue of ‘‘the exposure
puzzle’’.
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