Imports, Exports, Dollar Exposures, and Stock Returns

We measure the dollar risk exposure of U.S. industries by regressing stock portfolio returns on each industry against the returns on a broadly defined dollar index. The exposure estimates vary widely across different industries in both magnitudes and directions. We trace this large cross-sectional variation in dollar exposure to the industry’s average import and export activities. We find that the dollar exposure increases with imports but decreases with exports. On average, dollar appreciation helps the stock performance of import-oriented companies but hurts the stock performance of export-oriented companies. Based on this finding, we propose a methodology to combine the information in imports, exports, and stock returns to enhance the identification of the dollar risk exposure for different industries, and we analyze how each industry’s expected stock return varies with its dollar exposure. We identify a strongly negative risk premium for bearing positive exposures to the dollar. The risk premium moves with the business cycle and becomes more negative during recessions. JEL CLASSIFICATION CODES: G12, E32.