New Evidence on Exchange Rate Exposure.

By Richard Priestley and Bernt Arne Ødegaard, Norwegian School of Management

Abstract

This paper analyzes the currency exposure of industry stock returns. We show that when measuring currency exposure in regressions including the local stock market, one has to first, account for the currency exposure of the local market itself in the estimates, second, account for possible regime changes by the monetary authorities in exposure estimations, and third, use individual currencies of the major trading partners instead of a currency basket. When these issues are accounted for, exposure estimates are important in both an economic and statistical sense. These results are illustrated using data for Norway. The Norwegian case is particularly well suited for investigating these aspects of currency exposure since the economy is very open, has mainly dollar denominated exports and ECU denominated imports, and has had three official exchange rate policy regimes over the sample period.

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The current version of the paper is from November 2002.