The response of multinationals’ foreign exchange rate exposure to macroeconomic news

Abstract

We use intraday data to estimate the daily foreign exchange exposure of U.S. multinationals and show that macroeconomic news affects these firms' foreign exchange exposure. News creates a substantial shift in the joint distribution of stock and exchange rate returns that has both a transitory and a persistent component. For example, a positive domestic demand surprise, as reflected in higher-than-expected nonfarm payroll, increases the value of the low-exposure domestic activities and results in a persistent decrease in foreign exchange exposure.

Macroeconomic Determinants of Foreign Exchange Rate Exposure

“…For deviations between the actual and forecasted foreign CPI, I find a negative impact on the exposures, which is in line with Boudt et al (2017), who report a persistent effect of US CPI news on average exposures. Apparently, a higher-than-expected foreign CPI reduces exposures.…”

“…, the number of exposures that did not change signs for two prior years varies between 77 and 1266 observations with an adjusted R 2 from close to zero and up to 24%. LikeBoudt et al (2017) for persistent and transitory US CPI news, I observe a significant influence of foreign CPI and likeChaieb and Mazzotta (2013), I find a significant effect of TS across the majority of the industries. As stated in Hypotheses 3 and 4, foreign CPI and the foreign TS have a positive significant impact on the exposures that did not change signs for two prior years of potential (net) exporters and importers.…”

“…Chang et al, 2013), which would induce autocorrelation in the estimated exposures. Whereas Boudt et al (2017) use intra-day data to construct daily exposures, I chose weekly over intra-day data, as my aim is to determine whether companies adjust their strategic hedging behavior, which is more easily observable on a quarterly (see Brown, 2001) rather than on a daily basis. I collect at least 40 weekly observations in one year to generate adequate econometric inference.…”

“…In the context of currency risk, changes in exchange rates represent a significant source of risk for companies, as exchange rates affect their cash flows and thus their market value if they are not completely hedged (see e.g. Chang et al, 2013;Boudt et al, 2017). Moreover, macroeconomic determinants of companies' foreign export and import markets influence their specific currency risk.…”

Macroeconomic determinants of foreign exchange rate exposure

“…They find that the exposure's dynamics are mainly driven by the macroeco-nomic variables. Boudt et al (2017) use intra-day data of US multinationals to examine the influence of US macroeconomic news on the average estimated daily exposures. They test the impact of different GDP announcements, non-farm payrolls, different price announcements, the trade balance, federal fund target rate and 10-year yield.…”