Essays in Foreign Exchange Exposure and International Finance.

摘要

In the first essay we examine stock prices of internationally exposed firms traded in the U.S. markets. We posit that additional frictions and risk premiums affect both, expected future cash flows, as well as future expected returns. Applying Campbell's (1991) variance decomposition framework, we find that the volatility of unexpected stock returns, discount rate-, and cash flow news increases for internationally exposed firms. We also observe that news becomes more offsetting with increased global exposure, suggesting that increases in future expected cash flows are coupled with simultaneous increases in risk and vice versa.;In the second essay, we argue that when estimating foreign exchange (FX) exposure using equity returns, a bond return control variable is theoretically superior to a conventional equity index. Supporting that argument is our primary empirical finding: for a large sample of U.S. stocks, we find that direct estimates of FX net cash flow exposure are significantly more correlated with the partial FX equity exposure estimates found using a bond return control variable than with those found using an equity index.;In the third essay, we study the effect of foreign exchange (FX) exposure on the term structure of industry cost of equity. Expanding the methodology developed by Ang and Liu (2004) we find that: 1) Capturing FX exposure in the asset-pricing model changes the position and shape of the spot discount curves; 2) The average industry FX risk premium is around 2.81% for cash flows with short-term maturities (around 34% of the total industry cost of equity); 3) For most industries the FX risk premium declines with increasing cash flow maturities; 4) The pricing error from ignoring the term structure is substantially larger than the pricing error resulting from the omission of the FX risk component.