Imports, Exports, Currency Risk Exposure, and Stock Returns

Economic theory suggests that the magnitude and direction of a company’s currency risk exposure depends crucially on its fundamental involvement in international trade. For US industries, we find that the stock performance of an import-oriented company moves positively with the performance of the dollar, but the stock performance of an export-oriented company tends to move against the dollar. Based on this finding, we use the imports and exports information to enhance the identification of the currency risk exposure for different industries, and we analyze how each industry’s expected stock return varies with its currency risk exposure. We identify a strongly negative risk premium for bearing positive exposures to the dollar. On average, import-oriented companies generate lower stock returns. Furthermore, we find that the risk premium moves with business cycles and becomes more negative during recessions than during expansions. JEL CLASSIFICATION CODES: G12, E32.