Identifying the Sources of Exchange Rate Exposure: Integrating Rolling Window Regression and Panel Data Analysis Approaches

This article attempts to identify the various sources governing the phenomenon of exchange rate exposure for 336 firms from 2012 to 2022. The study employs the two-step procedure to achieve the desired objective. In the first step, dynamic and time-varying exchange rate exposure coefficients have been estimated using rolling window regression, whereas, in the second step, a fixed-effects model of panel data analysis with Driscoll and Kraay’s (1998) standard errors has been estimated to explore the factors affecting the exchange rate exposure. The study finds a positive relationship between exchange rate exposure and the size of a firm and the level of debt a firm possesses, indicating that corporate hedging in India has not effectively reduced exchange rate risk. Likewise, the firm’s growth, asset utilization, and profitability are the fundamental drivers of growth, whereas export revenue decreases the exchange rate exposure. The study suggests that managers must aim to increase exports to act as an effective tool for hedging the exchange rate risk. Also, financial managers should judiciously use the debt component in the capital structure to avoid adversely affecting the firm’s value.