Exchange rate sensitivity - a study of stock price sensitivity to unexpected changes in the EUR/SEK exchange rate
Abstract: Purpose: To investigate if there is a significant stock price sensitivity towards the currency pair for portfolios of Swedish companies and how this sensitivity differs between sectors, firm size and foreign to total sales ratios. Methodology: Use orthogonalized unexpected movements in a market index and the exchange rate and regress these on portfolio returns sorted by sector, firm size and foreign to total sales ratios. This is done with instruments for information available to investors and through the use of multiple linear regression analysis. Applied Theories: The thesis is largely influenced by the article by Doukas, Hall and Lang (2003). The thesis makes use of well-known theories within asset pricing and theories about both the stock market and the foreign exchange. Some of these theories are the CAPM and Fama-French three-factor model. Results: We found significant stock price sensitivity towards unexpected currency movements in several portfolios. This means that the stock returns are influenced by changes in the foreign exchange rates and something that an investor should be aware about. We also found that the sensitivity differs between sectors, firm size and foreign to total sales ratios.
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