Stock return exposure to exchange rate risk: A perspective from delayed reactions and hedging effects

This paper investigates the absence of prevailing evidence on the significant exposure of US stocks to exchange rate risk by considering a firm's pre-hedging currency exposure, its expected hedging activity and the delayed reaction of its stocks to currency movements. Although we demonstrate the importance of lagged exposure relative to contemporaneous exposure, the inclusion of the lagged effect in the exposure measurement still fails to raise the significance of the exchange rate risk with regard to the pricing for the overall sample of stocks. We further demonstrate that the weak evidence on priced currency risk is at least partly attributable to hedging activity, particularly for large firms. Finally, our results provide partial support for the asymmetric hedging hypothesis, in that asymmetric hedging is found to be responsible for reshaping the relationship between a firm's characteristics and its currency exposure.