PurposeThis study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy, and the UK.Design/methodology/approachThe paper utilises the methodology of Campbell and Mei (1993) to decompose systematic risks into components attributable to news about future dividends (cash flows), real interest rates and excess returns.FindingsIn addition to significant market risk, the paper finds significant levels of exposure to exchange rate risk in industries in all four markets. Significant levels of interest rate risk are only identified in Germany and France. All three sources of risk contain significant information about future cash flows and excess returns.Research limitations/implicationsFuture research could investigate the extent of exposure in other markets, or investigate whether the findings change at the firm level. Additionally it could be investigated whether recent asset pricing work such as Campbell and Vuolteenaho (2004) can be utilised to investigate this research problem.Practical implicationsThe paper identifies which industry portfolios have significant exposures and decomposes these risks. This information is relevant for investors and portfolio managers, as well as financial management within the firm.Originality/valueThe paper utilises an alternative econometric methodology to investigate the extent of exposure to exchange rate and interest risks in industrial portfolios in four European markets.