Cracks in the Crystal Ball: What Happens to Firmss Foreign Exchange Rate Exposure When Forecasters Don't Agree About the Future

Abstract

textabstractThe central issue of this paper is whether stock prices are exposed to total exchange rate movements – as traditionally measured – or to revisions in expected future exchange rate movements and unanticipated currency shocks, and by how much of each. Based on a sample of 1675 U.S. firms operating in Europe and in Japan our results reveal that disaggregat- ing total exchange rate changes in expected and unexpected exchange rate movements leads to a more accurate and more intuitive measurement of firms’ exchange rate exposure. In addition, theory expects that investors lend more credibility to forecasts communicated by expert panels when they display a low dispersion, hinting to agreement among experts, than when they display a higher dispersion. When uncertainty is higher, and when the informational content of these forecasts may be considered as less meaningful, investors should be reluctant to incorporate experts’ an- ticipations in stock market values. Based on our time-varying estimates of the probability of agreement among experts, we find concluding empirical evidence in favour of this hypothesis.