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German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs

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Author Info
Entorf (Darmstadt University of Technology)
Jamin (McKinsey & Company)

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Abstract

This article analyses value changes of German stock market companies in response to movements of the US dollar. The approach followed in this work extends the standard means of measuring exchange rate exposure in several ways, e.g. by us-ing multi-factor modelling instead of augmented CAPM, application of moving window panel regressions, and orthogonalization of overall market risk vis-à-vis currency risk. A further innovation lies in testing theoretical implications of exchange rate adjustment costs (hedging costs) for firm values and economic exposure. Based on time series and panel data of German DAX companies, DM/ dollar rates and macroeconomic factors, we find a rather unstable, time-variant exposure of German stock market companies. Dollar sensitivity is positively affected by the ratio of exports/GDP and negatively af-fected by imports/GDP. Moreover, as expected from theoretical findings, firm values and exchange rate exposure are significantly reduced by adjustment costs depending on the distance of the exchange rate from the expected long-run mean

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Paper provided by EconWPA in its series International Finance with number 0508005.

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Length: 42 pages
Date of creation: 11 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0508005

Note: Type of Document - pdf; pages: 42
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Related research
Keywords: exchange rate exposure; international trade; panel econometrics; adjustment costs;

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
F31 - International Economics - - International Finance - - - Foreign Exchange
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Horst Entorf & Gösta Jamin, 2003. "The dollar and the German stock market: determination of exposure to and pricing of exchange rate risk using APT-modelling," Darmstadt Discussion Papers in Economics 127, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
    Other versions:
  2. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, EconWPA. [Downloadable!]
  3. Entorf, Horst & Moeber, Jochen & Sonderhof, Katja, 2007. "The foreign exchange rate rate exposure of nations," ZEW Discussion Papers 07-005, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  4. Mevlud Islami, 2008. "Interdependence Between Foreign Exchange Markets and Stock Markets in Selected European Countries," Schumpeter Discussion Papers sdp08007, Universitätsbibliothek Wuppertal, University Library. [Downloadable!]
  5. Horst Entorf & Jochen Moebert & Katja Sonderhof, 2006. "The Foreign Exchange Rate Exposure of Nations," Darmstadt Discussion Papers in Economics 169, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
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