Linear and Nonlinear Exchange Rate Exposure and the Price of Exchange Rate Risk

EFA 2002 Berlin Meetings Presented Paper

48 Pages Posted: 19 Mar 2002

Date Written: April 2002


Current empirical research concludes that the effect of exchange rates on US stock returns is negligible. In contrast, we present new evidence that numerous US industries are exposed to exchange rates. The differences between our findings and those in the extant literature are a result of using a new methodological approach which takes account of exchange rate regimes based on periods of depreciation and appreciation. Within each regime we show that first, the market's own exposure to exchange rates should be taken into account before considering industry exposure, second, bilateral rates should be used as opposed to a currency basket, and third, the possible nonlinear nature of exchange rate exposure should be considered. We present new empirical evidence of important economic and statistical linear and nonlinear relationships between exchange rates and industry stock returns. The size and sign of exposure coefficients in each regime depends on the extent to which an industry imports and exports. We also present new results regarding the pricing of bilateral currency risk which we find to be statistically and economically significant. The expected return earned due to exchange rates is positive when the dollar is appreciating and negative when the dollar is depreciating.

Keywords: Currency exposure, depreciation regime, appreciation regime, nonlinear exposure, exchange rate price of risk

JEL Classification: F3, F36, G12, G18

Suggested Citation

Ødegaard, Bernt Arne and Priestley, Richard, Linear and Nonlinear Exchange Rate Exposure and the Price of Exchange Rate Risk (April 2002). EFA 2002 Berlin Meetings Presented Paper, Available at SSRN: or

Bernt Arne Ødegaard

University of Stavanger ( email )

UiS Business School
Stavanger, NO-4036


Richard Priestley (Contact Author)

Norwegian Business School ( email )

N-0442 Oslo, 0283
47 46410515 (Phone)

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