Digesting FOREXS: Information Transmission Across Asset Classes and Return Predictability

Joon Woo Bae (), Zhi Da () and Virgilio Zurita ()
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Joon Woo Bae: Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106
Zhi Da: Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556
Virgilio Zurita: Hankamer School of Business, Baylor University, Waco, Texas 76706

Management Science, 2024, vol. 70, issue 3, 1943-1969

Abstract: We provide novel evidence that equity investors react to currency shocks with a delay. Using the cross-section of currency returns and the relative presence of U.S. firms in foreign economies, we compute a foreign operations-related exchange shock ( FOREXS ) measure. We find FOREXS to predict firms’ future cash flows and stock returns, driving much of the previously documented underreaction to foreign information. An FOREXS -based long-short strategy yields a 6.74% annualized abnormal return. FOREXS predictive power comes from firms’ incomplete hedging and investors’ limited attention, highlighting the challenges involved when processing information from a different asset class.

Keywords: return predictability; currency information; foreign operations (search for similar items in EconPapers)
Date: 2024
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