Cracks in the crystal ball

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 disaggregat- ing 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. 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’ an- ticipations in stock market values. Based on our time-varying estimates of the probability of agreement among experts, we find concluding empirical evidence in favour of this hypothesis.

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