EXCHANGE RATE EXPOSURE AND STOCK BETAS
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In this paper, I examine the impact offoreign exposure ofa company on the systematic and total risk ofa company. The systematic risk ofa company is measured as the sen itivity ofthe company[s stock with respect to the home-country market (in this paper, the U.S. market) and total risk is measured as the standard deviation of the return on the stock. Ifthe beta ofa companysforeign operations with respect to theforeign market is high and/or the foreign market has high correlation with the U.S. market and/or theforeign market has high volatility relative to the U.S. market, the systematic and total risk ofa company withforeign market operations may, theoretically at least, be higher than an identical company with no foreign operations. The existence and extent of risk reduction due to the presence offoreign operations is, therefore, an empirical question. In this study, I examine these issues empirically. My results indicate that foreign market exposure did not Lead to significant decreases in beta over the period 1973- 97.
Abstract
In this paper, I examine the impact offoreign exposure ofa company on the systematic and total risk ofa company. The systematic risk ofa company is measured as the sen itivity ofthe company[s stock with respect to the home-country market (in this paper, the U.S. market) and total risk is measured as the standard deviation of the return on the stock. Ifthe beta ofa companysforeign operations with respect to theforeign market is high and/or the foreign market has high correlation with the U.S. market and/or theforeign market has high volatility relative to the U.S. market, the systematic and total risk ofa company withforeign market operations may, theoretically at least, be higher than an identical company with no foreign operations. The existence and extent of risk reduction due to the presence offoreign operations is, therefore, an empirical question. In this study, I examine these issues empirically. My results indicate that foreign market exposure did not Lead to significant decreases in beta over the period 1973- 97.