to a time series regression of each firm’s excess return on a constant and on the excess
market returns. That is, we estimate the parameters ȕUS$, ȕ€, ȕ£ and ȕ¥ (along with J0, Jh,
and Jw) in the following equation:
ri,t = J 0 + J h rh,t + J w rw,t
t U S U S s $ , $ + E
t e u r o e u r o s , + E
t s , ¥ ¥ + E
t s , £ £ + E
where time and individual firms are indexed by t and by i; and, excess returns and
exchange rate changes are defined below.
8 Return on equity i, less the return to the local short-term government asset.
Ł International market return less the U.S 90 day Treasury bill return, denominated ex post in local currency.
Ł Local market return less the local short-term government asset.
sUS $, t
Ł Nominal local currency appreciation or depreciation against the U.S. dollar.
Ł Nominal local currency appreciation or depreciation against the euro (prior to 1999 we use the German mark).
Ł Nominal local currency appreciation or depreciation against the Japanese yen.
Ł Nominal local currency appreciation or depreciation against the U.K. pound.
Ł Regression residual.
Table 2 summarizes some of the key results of the estimation of Equation 1 for
each firm using weekly returns, and where the exchange rate appreciation or depreciation
is defined as the percentage change in the exchange rate over the week.9 Columns one
8 In additional estimates, available from the authors, we define r,t as a return generated from a portfolio of five stocks. We find that somewhat more of these portfolio returns appear to be sensitive to exchange rates;
but the overall picture is roughly similar. Definitions and sources of the stock market and government returns are given in Appendix Tables 1 and 2. 9