252 FINANCIAL INSTABILITY AND THE EVOLUTION OF FOREIGN EXCHANGE EXPOSURE OF EUROPEAN FIRMS 1 Julio Huato St. Francis College Economics Department 180 Remsen Street Brooklyn Heights, NY 11201 U.S.A. e-mail: juliohuato@gmail.com telephone: 718-489-533 Jason Hecht Ramapo College of New Jersey Anisfield School of Business 505 Ramapo Valley Road, Mahwah, NJ 07430 U.S.A. e-mail: jayhecht@gmail.com telephone: 201-684-7037 Mihail Velikov Ramapo College of New Jersey Anisfield School of Business 505 Ramapo Valley Road, Mahwah, NJ 07430 U.S.A. e-mail: velikov.mihail@gmail.com telephone: 201-917-6238 Abstract In rugged times, financial managers need a superior grasp of the dynamics of foreign- exchange exposure. Although its time-variability has long been recognized, most recent empirical measures of exposure continue to be estimated with methods that assume it constant over time. In this work, we offer a first approximation to the dynamics of exposure by using, alternatively, rolling-window regression and a Kalman-filter specification to estimate time- varying exposures on the daily returns of 1,031 European firms from January 2000 through May 2009, a period marked by two large upswing- downswing cycles in the European stock markets. This paper summarizes the main results graphically and begins its examination. Keywords: exposure; time-varying exposure; exchange rates; foreign-exchange risk JEL codes: G11, G14, G15 1 The authors gratefully acknowledge research funding from the Anisfield School of Business, Ramapo College of New Jersey. Special thanks to Dr. Lewis Chakrin for his continuous encouragement. This paper is the first of a pilot study testing a methodology that we intend to apply to a much broader set of firms and countries, with the ultimately goal of examining the sources of foreign exchange exposure in a dynamic context.