Stock Prices and Effective Exchange Rates
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The rapid expansion in international trade during the 1970s and the adoption of freely floating exchange rate regimes by many industrialized countries in 1973 heralded a new era of increased exchange rate volatility. Inevitably, firms’ exposure to foreign exchange rate risks increased. The literature identifies three types of risk that exist under floating exchange rate regimes: transaction exposure, economic exposure, and operating exposure.1 Transaction exposure arises from gains or losses incurred in the settlement of investment transactions stated in foreign currency terms; economic exposure arises from variation in a firm’s discounted cash flow when exchange rates fluctuate; and operating exposure arises from the sensitivity of a firm’s home currency value to changes in exchange rates.
KeywordsExchange Rate Stock Market Unit Root Stock Price Percent Level
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- 1.See Abdalla and Murinde (1997) and Jorion (1990).Google Scholar