The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures

Söhnke M. Bartram and G. Andrew Karolyi ()

Finance from EconWPA

Abstract: This paper examines whether the introduction of the Euro in 1999 was associated with lower stock return volatility, market risk exposures and foreign exchange rate risk exposures for 12,821 nonfinancial firms in Europe, the United States, and Japan. We show that though the Euro led to a significant decrease in the volatility of trade-weighted exchange rates of European countries, stock return variances of nonfinancial firms increased after its introduction. However, the Euro was also accompanied by significant reductions in market risk exposures for nonfinancial firms in and outside of Europe. We show that the reduction in market risk was not as a result of changes in financial leverage, and that it is concentrated in firms with a high fraction of foreign sales in Europe, a high fraction of total foreign sales and larger market capitalizations. In addition to its impact on market betas, the Euro has a positive effect on the incremental foreign exchange rate exposures, particularly for multinationals.

Keywords: Foreign exchange rates; exposure; Euro; corporate finance; risk management; derivatives (search for similar items in EconPapers)
JEL-codes: G3 F4 F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fin and nep-ifn
Date: 2002-08-16, Revised 2003-10-29
Note: Ohio State University, Dice Center for Research in Financial Economics, Working paper No. 2003-19
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Related works:
Working Paper: The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures (2004)
Journal Article: The impact of the introduction of the Euro on foreign exchange rate risk exposures (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0207005

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