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Is the exchange rate exposure puzzle really a puzzle? International evidence

Chu-Sheng Tai (Department of Accounting and Finance, JHJ School of Business, Texas Southern University, Houston, Texas, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 30 April 2024




Given the difficulties in finding significant exchange rate exposure in the extant literature, this paper attempts to resolve the so-called “exposure puzzle” by investigating whether currency movements have any significant impact on international industry returns.


This paper utilizes the multivariate Generalized AutoRegressive Conditional Heteroskedasticity (MGARCH) methodology to estimate both symmetric and asymmetric exchange rate exposures for each industry common across 12 countries simultaneously.


The empirical results show that exchange rate exposure is not only statistically significant but also economically important based on the estimation of an asymmetric three-factor exposure model using MGARCH methodology. This is an extremely important finding as it suggests that the “exposure puzzle” may not be a puzzle at all once a better methodology is utilized in the estimation.

Research limitations/implications

Because this study tries to resolve the exchange rate exposure puzzle by focusing on whether exchange rate movements affect ex-post returns as opposed to ex ante expected returns and given the significant exposures with respect to different risk factors found in the study, it is interesting to see if any of these risk factors commands a risk premium. In other words, a natural extension of this study is to test whether any of these risk factors is priced in international industry returns.

Practical implications

The findings of the study have interesting implications for international investors who would like to diversify their portfolios across different industries and are concerned about whether the unexpected movements in the bilateral exchange rates will affect their portfolio returns in addition to its interest rate and world market risk exposures.


The study utilizes the MGARCH methodology, which has not been fully exploited in the exchange rate exposure literature.



Tai, C.-S. (2024), "Is the exchange rate exposure puzzle really a puzzle? International evidence", Managerial Finance, Vol. ahead-of-print No. ahead-of-print.



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