Department of Economics and Business Economics

Firm-Specific Foreign Exchange Exposure Identification: The Fallacy of the Stock Market Approach

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  • Tom Aabo
  • Danielle Brodin, DuPont, Denmark
Previous studies have used the stock market approach to find the aggregate number of (firms with) foreign exchange exposures in a given country, region, or industry. Methodologies have differed in many aspects but two of the most basic differences relate to observation frequency and the choice of market index. Aggregate numbers have been shown to be (marginally) sensitive to the methodology employed. However, a corporate manager, an investor, or a stock analyst following a specific firm is not interested in the sensitivity on an aggregated level but on a firm-specific level. If the results for a specific firm are robust across methodologies, the corporate manager, the investor, or the stock analyst will rely on such results to a larger extent that if the results are highly sensitive to e.g. a change in observation frequency. We apply firm-specific sensitivity analysis to Scandinavian non-financial firms and find limited consistency in the detected exchange rate exposures when altering methodology in terms of observation frequency and choice of market index. The results put a question mark to the validity of the stock market approach for exchange rate exposure identification at the firm-specific level.
Original languageEnglish
JournalApplied Economics and Finance
Volume1
Issue1
Pages (from-to)1-12
Number of pages12
ISSN2332-7308
DOIs
Publication statusPublished - 2014

    Research areas

  • Market index , Exchange rate exposure, Stock market approach, Exposure identification, Observation frequency

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