Sources of time-varying exchange rate exposure

We report evidence of a time-varying link between returns on national stock market indexes and exchange rate returns (exchange rate exposure).We use this evidence to analyze the sources of changes over time in exchange rate exposure. Using monthly data for 14 industrialized countries for the period 1975–2006, we report evidence of a cointegration relation between exchange rate exposure and the industry composition of a country’s imports, and weaker evidence of a cointegration relation between exchange rate exposure and openness to trade.