Foreign exchange rate exposure: Evidence from Canada

• Author: Mohammad Al‐Shboul,Sajid Anwar
• Published date: 01 January 2014
• DOI: http://doi.org/10.1016/j.rfe.2013.12.001
• Date: 01 January 2014

Foreign exchange rate exposure: Evidence from Canada

Mohammad Al-Shboul

a,1

, Sajid Anwar

b,c,

⁎

a

Departmentof Accounting, Bankingand Financial Sciences,College of BusinessAdministration andEconomics, Al-HusseinBin Talal University, POBox (20), Ma'an 71111, Jordan,

b

Schoolof Business, Universityof the Sunshine Coast, Maroochydore DC, Queensland4558, Australia

c

IGSB,University of South Australia,Adelaide, South Australia5001, Australia

abstractarticle info

Articlehistory:

Received25 October 2012

Receivedin revised form 21 November2013

Accepted4 December 2013

Availableonline 12 December 2013

JEL classification:

G32

G12

G01

F31

D53

D82

Keywords:

Financialrisk

Foreignexchange rate

Nonlinear exposure

Asymmetricexposure

Nonparametricmethods

Using weekly datafrom 2003 to 2011, this paper examines the presenceof exchange rate exposure in thirteen

Canadian industry sectors. This study co ntributes to the literature in a number of ways: (i) it considers the

presenceof exposure not onlyin the full sample but also in thepre and post-Global FinancialCrisis (GFC)periods,

(ii) it considersboth linear and nonlinearexposure and (iii) it makes use of thesign and size bias tests to inves-

tigatethe presence of asymmetricexposure. In general,we find some evidence of linear andnonlinear exposure

in the full sampleas well as in the pre and post-GFC sub-samples.We also find weak evidenceof an asymmetric

exposuresign effect on stock returnsin the full and pre-GFC sample periods.Stock returns are found torespond

asymmetricallyto the positive magnitude of exposure in both the-pre and post-GFCsample periods. In overall

terms, the GFCappears to have weakly contributedto the overall strength of the exposure.

© 2013 ElsevierInc. All rights reserved.

1. Introduction

Finance theory suggeststhat corporate foreign currency cash flows

affect firm value. This effectarises from exports, imports, foreign debt,

cash flows of foreign subsidiaries and foreig n portfolio investments

(Adler & Dumas,1984; Jorion, 1991; Allayannis & Ofek,2001). Further-

more,relatively more complexexposures may resultfrom the impact of

foreign exchange rate changes on pric es and quantities, production

costs, market shares and thus the competitive position of firms (Levi,

1994; Bartram, 2004). The empirical evid ence concerning exchange

rate exposureis mixed. Whilesome studies have foundstrong evidence

of exposure (e.g. Allayannis & Ofek , 2001; El-Masry & Abdel-Salam,

2009; El-Masry, Abdel-Salam, & Alatraby, 2007; Williamson, 2001), a

large number of studies report the absence of statistically significant

exposure (e.g., Al-Shboul & Alison, 2009; Atindehou & Gueyie, 2001;

Bartram & Bodnar, 2012; He & Ng, 1998).

A number of explanations have been provided for this so-called expo-

sure puzzle. It has been suggested that linear foreign exchange rate expo-

sure can be reduced by linear hedging instruments such as forward and

futures contracts (Adam, 2009; Adler & Dumas, 1984; Froot, Scharfstein,

&Stein,1993). However, due to a nonlinear relationship between corpo-

rate cash flows and exchange rates, firms may also be subject to nonlin-

ear exposure (e.g., Giddy & Dufey, 1995). This exposure cannot be totally

hedged unless nonlinear hedging instruments such as options or portfo-

lios of options are used. A number of recent studies have considered the

possibility of nonlinear exposure (e.g., Bartram,2004; Brooks, Di Iorio,

Faff, Fry, & Joymungul, 2010; Koutmos& Martin, 2003; Miller & Reuer,

1998; Williamson, 2001). Most of these studies consider firm level

non-linear exposure in the US, Japan, Australia and Germany.

This papercontributes tothe existing literaturein a number of ways.

Firstwe consider the possibilityof exposure in a numberof Canadian in-

dustry sectors. Canadian indu stry sectors have not been subject to a

broad empiricalanalysis, yet they offer themselvesparticularly well to

the study of theexposure phenomenon. By makinguse of weekly data

from 2003 to 2011, this paper considers th e link between foreign

exchange rate risk and stock market returns in 13 Canadian industry

sectors. Thesample period considered in our studyincludes the period

of global financial crisis (GFC), wh ich significantly affected the

Reviewof Financial Economics 23 (2014)18–29

⁎Correspondingauthor. Tel.:+ 61 7 5430 1222.

E-mailaddresses: m.shboul@ahu.edu.jo(M. Al-Shboul), SAnwar@usc.edu .au (S.Anwar).

1

Tel.: +962 3 2179 000x8343.

1058-3300/$–see front matter © 2013 ElsevierInc. All rights reserved.

http://dx.doi.org/10.1016/j.rfe.2013.12.001

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Review of Financial Economics

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