1. Imports, Exports, Dollar Exposures and Stock Returns
Prepared for NASM 2008
Suparna Chakraborty, Yi Tang and Liuren Wu
Baruch College, CUNY

2. Trinity of issues Identifying exchange rate exposure
Does a firm’s value fluctuate with exchange rate?
Economic fundamentals accounting for exposure
Focus on international trade
Market pricing of exchange rate exposure
Do investors charge premium for being exposed to exchange rate fluctuations?

3. Previous literature Currency risk exposures Economic drivers
Jorion (1990), Bodnar and Gentry (1993),
Amihud (1994), Dominguez and Tesar (2001, 2006),
Campa and Goldberg (1995, 2005)
Economic drivers
Jorion (1990) , Dominguez and Tesar (2006), He
and Ng(1998)
Market pricing of risk
Jorion (1991), Dumas and Solnik (1995), De Santis
and Gerard (1998), Carrieri, Errunza, and Majerbi
(2004)

4. Our extension Focus on heterogeneity of exposure
Distribution of exposure across US industries
Search for source of heterogeneity in degree of internationalization
Does magnitude of international trade matter?
Seek evidence for heterogeneity in magnitude as well as direction
Expect exposure to be negatively related to exports and
positively related to imports
Does market recognize and price risk?

5. Our approach Concentrate on US industries
4-digit SIC level
Identify exchange rate exposure
Regress excess returns of industry portfolios against
Excess returns on the dollar index, controlling for
market risks
Focus on exports and imports as drivers
Regress exposure estimate on exports and imports
separately instead of an aggregate measure of
internationalization
Link exchange rate exposure to expected stock returns
Enhance exposure to get better identification of risk
premium using information on imports and exports

6. Key findings Evidence of exposure Direction of openness matters
Significant intra and inter industry heterogeneity in
dollar exposure
Direction of openness matters
Import-oriented (export-oriented) industries on average
are significantly and positively (negatively) related to
currency exposures.
Identification of risk premium
Industries whose stock returns are more sensitive to
currency risks on average earn lower returns.

7. Industry heterogeneity: Example
Full sample estimation
Space vehicle equipment
-2.417
Boot & shoe cut stocking
-1.571
Household refrigerator & freezer
1.799
Ordnance & necessary accessories
1.145

8. Heterogeneity of exposure

9. Industry Heterogeneity: Results
Mean
Min
Max
Stdev
Cross-sectional statistics of full sample estimates
0.048
-2.417
1.799
0.629
Cross-sectional statistics of time-series averages of rolling-window estimates
0.111
-2.188
2.994
0.614
Time-series statistics of cross-sectional averages of rolling-window estimates
0.058
-0.060
0.164
0.061
Cross-sectional averages of time-series statistics of rolling-window estimates
-0.295
0.529
0.296

10. Exposure & Internationalization
Literature
Specification 1
bfx=a0+a1*Ln(abs(IM+EX)/ME)+ ε
Our model
Specification 2
bfx=a0+a1*Ln(abs(IM/ME))+ a2*Ln(abs(EX/ME))+ ε
Restricted version
Specification 3
bfx=a0+a1*Ln(abs(IM/EX)) + ε

11. Exposure & Internationalization
Full sample estimation
Specification 1
Specification 2
Specification 3
Intercept
(-.92)
.0394 (.92)
.0352 (1.1)
Ln (IM+EX/ME)
.0129 (.75)
Ln (IM/ME)
.0583 (2.68)
Ln (EX/ME)
(-1.93)
Ln (IM/EX)
.0466 (2)
R-squared
.23%
1.84%
1.34%
Adjusted R-squared
-.01%
.99%
.74%

12. Exposure, Internationalization & Risk premium
Does dollar exposures transmit to expected stock returns?
Can incorporating real macro measures
of internationalization enhance
identification of dollar risk premium?

13. Measuring risk premium
Fama-McBeth (1973) measure of risk premium
Our alternative measure of risk premium

14. Measuring risk premium
Does dollar exposures transmit to stock returns? η0
ηfx
ηmkt
ηsmb
ηhml
Fama-McBeth (1973)
0.4713
(1.14)
(-0.29)
0.1605
(0.43)
0.0416
(0.17)
(-0.04)
Our alternative
0.4777
(-1.68)
0.1240
(0.34)
0.0771
(0.30)
0.0181
(0.07)
λ(IM)= (11.20)
λ(EX)= (-10.64)

15. Robustness test Focus on 4 alternative sources of risk
Are imports and exports significant if we account for other sources of systematic risk?
Focus on 4 alternative sources of risk
Default spread
Term spread
Log dividend-price ratio
Three month treasury bill rate

16. Exposure & Internationalization -Robustness test
Full sample estimation: Specification 2
Benchmark model
Appended model
Intercept
.0394 (.92)
(–1.05)
Ln (IM/ME)
.0583 (2.68)
.0612 (2.65)
Ln (EX/ME)
(-1.93)
(-2.62)
R-squared
1.84%
1.96%
Adjusted R-squared
.99%
1.46%

17. Measuring risk premium -Robustness testη0
ηfx
ηmkt
ηsmb
ηhml
ηdfl
ηtrm
ηdpr
ηtbr
Fama-McBeth
(1973)
.4348
(1.08)
-.0294
(-.31)
.1952
(.51)
.0231
(.09)
-.0201
(-.08)
.0144
(1.57)
.028
(1.15)
-.0671
(-.6)
-.0619
(-1.9)
Our
alternative
.4387
(1.06)
(-1.94)
.1413
(.37)
.0699
(.27)
.0046
(.02)
(1.55)
.0352
(1.42)
-.0587
(-.53)
-.067
(-1.99)

18. Conclusions
Separately including exports and imports helps shed light on magnitude and direction of exposure
Information about currency exposure embedded in imports and exports facilitates identification of currency exposures.