Measuring currency exposure with quantile regression
Published online: 26 October 2012
Ó Springer Science+Business Media New York 2012
Abstract In this paper, we explore an alternative explanation of the exposure puzzle, the
missing variable bias in previous studies. We propose to correct the bias with the quantile
regression technique invented by Koenker and Bassett (Econometrica 46:33–51, 1978).
Empirically, as soon as we take into account the missing variable bias as well as time
variation in currency exposure, we ﬁnd that 26 out of 30 or 87 % of the US industry
portfolios exhibit signiﬁcant currency exposure to the Major Currencies Index, and 23 out
of 30 or 77 % show signiﬁcant exposure to the Other Important Trading Partners Index.
Our results have important theoretical and practical implications. In terms of theoretical
signiﬁcance, our results strengthen the ﬁndings in Francis et al. (J Financ Econ
90:169–196, 2008), and suggest that methodological weakness, not hedging, may explain
the insigniﬁcance of currency risk in previous studies. In terms of practical signiﬁcance,
our results suggest a simple yet efﬁcient approach for managers to estimate currency
exposure of their ﬁrms.
Keywords Currency exposure Á Missing variable bias Á Exposure puzzle Á
JEL Classiﬁcation G15 Á F31
D. Du (&) Á P. Ng Á X. Zhao
The W. A. Franke College of Business, Northern Arizona University, PO Box 15066, Flagstaff,
AZ 86011, USA
Rev Quant Finan Acc (2013) 41:549–566