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Imports, Exports, Dollar Exposures, and Stock Returns

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Abstract

Economic theory suggests that the magnitude and direction of a firm’s currency risk exposure depends crucially on its fundamental involvement in international trade. For U.S. industries, we find that the stock performance of import-oriented companies moves positively with the performance of the dollar, but the stock performance of export-oriented companies tends to move against the dollar. Based on this finding, we use the imports and exports information to enhance the identification of the dollar risk exposure for different industries, and analyze how each industry’s expected stock return varies with its dollar risk exposure. We identify a strongly negative risk premium for bearing positive exposures to the dollar. On average, import-oriented companies generate lower expected stock returns.

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Notes

  1. It is well-known that the beta estimates from regressing stock returns on the market portfolio return are very noisy. Many corporate finance textbooks explicitly recognize the noisy feature of the beta estimates and propose various methods to reduce the noise, such as by averaging within peers, bottom-up analysis, and leverage analysis.

  2. For balanced panels with correlated regression errors, the literature often uses seemingly unrelated regressions to improve the identification of the coefficients. In our case, the panel is not balanced. We reduce the correlations in the errors by controlling the common stock market risk factors. As a robustness check, we have repeated the analysis by controlling additional risk factors from other markets, such as default spreads, term spreads, and log dividend-price ratio. Adding these additional control factors does not alter the main conclusions of the analysis.

  3. Consistent with our argument, Pritamani et al. (2004) also find that the exposure estimates tend to be positive for import industries and negative for export industries, with or without controlling for the market portfolio return.

  4. For example, Bartram et al. (2010) find that financial hedging with foreign currency debt, and to a lesser extent currency derivatives, reduces the exposure by about 40 %.

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Acknowledgments

The authors thank George S. Tavlas (editor-in-chief), three anonymous referees, Yakov Amihud, David Backus, Turan Bali, Craig Brown, Ozgure Demirtas, Linda Goldberg, Armen Hovakimian, Michael Melvin, Kenneth Singleton, Chris Telmer, Rui Yao, Stanley Zin, and seminar participants at Baruch College, the North American Summer Meetings of the Econometric Society 2008, and the West Coast Workshop in International Finance and Open Economy Macroeconomics 2014 for comments.

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Authors and Affiliations

  1. Deptartment of Economics, University of San Francisco, 2130 Fulton Street, San Francisco, CA, 94117, USA

    Suparna Chakraborty

  2. Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023, USA

    Yi Tang

  3. Zicklin School of Business, Baruch College, One Bernard Baruch Way, New York, NY, 10010, USA

    Liuren Wu

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  1. Suparna Chakraborty
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Correspondence to Suparna Chakraborty.

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Chakraborty, S., Tang, Y. & Wu, L. Imports, Exports, Dollar Exposures, and Stock Returns. Open Econ Rev 26, 1059–1079 (2015). https://doi.org/10.1007/s11079-015-9362-z

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