Imports, Exports, Dollar Exposures, and Stock Returns

Economic theory suggests that the magnitude and direction of a firm’s currency risk exposure depends crucially on its fundamental involvement in international trade. For U.S. industries, we find that the stock performance of import-oriented companies moves positively with the performance of the dollar, but the stock performance of export-oriented companies tends to move against the dollar. Based on this finding, we use the imports and exports information to enhance the identification of the dollar risk exposure for different industries, and analyze how each industry’s expected stock return varies with its dollar risk exposure. We identify a strongly negative risk premium for bearing positive exposures to the dollar. On average, import-oriented companies generate lower expected stock returns.