Exchange Rate Exposure & The Stock Market: A Swedish Study 2001- 2005

Sammanfattning: This thesis aims to test the co-variation between stock performance and exchange rate fluctuations in Sweden, by running times series regressions on 172, non-financial, firms quoted on the Stockholm Stock Exchange (OMX) from 2001 to 2005. From this sample, 13 portfolios are constructed aimed to test for a possible pattern between firm characteristics and exposure. A cross-sectional regression is also run to further test for determinants. Hence, this thesis contributes to the scarce research on foreign exchange rate exposure in small open economies. Our expectations are to find significant positive exposure based on the high degree of openness and exports in Sweden. Foreign involvement is expected to be a determinant. We find weak significant positive contemporaneous exposure and somewhat higher significant negative lagged by one month exposure, at the 5% level. The negative lagged exposure dominates both our firm level and portfolio level results. However, when accounting for market capitalisation, contemporaneous and positive exposure is found to be significant. No significance is found in our cross-sectional regression. Analysing our results, hedging activities, foreign debt, import levels and the denomination of imports and exports, as well as a possibly lagged effect on the economy following a change in the exchange rate, are discussed as possible explanations.