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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)

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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Bibliographic Info

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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Web page: http://128.118.178.162

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Keywords: exchange rate exposure; international trade; panel econometrics; adjustment costs;

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References

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Cited by:
  1. Muller, Aline & Verschoor, Willem F.C., 2006. "Foreign exchange risk exposure: Survey and suggestions," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 385-410, October.
  2. Entorf, Horst & Moebert, 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.
  3. Prabhath Jayasinghe & Albert K. Tsui, 2009. "Time-Varying Currency Betas : Evidence from Developed and Emerging Markets," Finance Working Papers 22761, East Asian Bureau of Economic Research.
  4. Udo Broll & Jack E. Wahl & Christoph Wessel, 2011. "Export, Exchange Rate Risk and Hedging: The Duopoly Case," German Economic Review, Verein für Socialpolitik, vol. 12(4), pages 490-502, November.
  5. Christian Pierdzioch & Renatas Kizys, 2010. "Sources of time-varying exchange rate exposure," International Economics and Economic Policy, Springer, vol. 7(4), pages 371-390, December.
  6. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, EconWPA.

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