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Rev Fin 2001; 14:805-835
© 2001 the Society for Financial Studies

Exposure and Markups

George Allayannis
University of Virginia

Jane Ihrig
Federal Reserve Board

Abstract

This article examines how to properly specify and test for factors that affect exchange-rate exposure. Starting from theoretical underpinnings and a sample of U.S. manufacturing industries between 1979 and 1995, we find that 4 of 18 industry groups are significantly exposed to exchange-rate movements through the effect of industry competitive structure, export share, and imported input share. On average, a 1% appreciation of the dollar decreases the return of the average industry by 0.13%. Consistent with our model's predictions, as an industry's markups fall (rise), its exchange-rate exposure increases (decreases).


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