Static and Time-Varying Foreign Exchange Rate Exposure Estimation Methods

This study examines the contingency of foreign exchange rate exposure and its antecedents onmodelling techniques utilized in previous literature. Based on a sample of 567 US non-financiallisted companies the analysis reveals that only 11.29% of firms face exposure to the US$ tradeweightedcurrency index when Jorion’s equation is run. By orthogonalizing market returns,allowing time variation in specifications, and applying both approaches simultaneously, it isshown that 49.56%, 73.72%, and 99.64%, respectively, of sample firms are significantly exposedto the US$ trade-weighted exchange rate variable. The paper also highlights the dependency ofexposure sources on empirical representations, insofar as cross-sectional estimation yieldsfeeble results, while panel estimation indicates significant causality for several explanatoryvariables