Abstract
Most studies assume that exchange rate exposure is constant over time, which might explain the common finding that exposure is statistically insignificant and not economically important. In addition, there are conflicting results about the relationship between firm size and exchange rate exposure. I estimate exposure of 10 size-based portfolios and find that for each portfolio, exposure varies substantially over time, exposure is economically and statistically significant on average, and the risk premium arising from exchange rate exposure is economically large. In addition, small firms' average exposure is much larger than that of large firms. I also find that aggregate growth opportunity, U.S. ratio of imports to GDP, and especially aggregate liquidity have significant and differential explanatory power for the time variation of small and large firms' exposure.
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