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

The 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 disaggregating 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. This confirms the natural expectation that a significant proportion of multinational's stock price movements can be explained by a revision of expectations about future exchange rate movements. Results suggest furthermore that the impact of a disaggregated exchange rate factor is stronger than the impact of previously suggested exchange rate factors.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' anticipations in stock market values. Based on our time-varying estimates of the probability of agreement among experts, we find concluding empirical evidence in favor of this hypothesis