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Transparency in the foreign exchange market and the volume of international trade

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  • Broll, Udo
  • Eckwert, Bernhard
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    Abstract

    In this paper we study the impact of more transparency in the foreign exchange market on the ex ante expected volume of international trade. Transparency is measured by the informational content of publicly observed signals correlated to the random exchange rate. We find that more transparency may increase or decrease the volume of international trade. In particular, the impact of more transparency depends the curvature of the marginal cost function of the firms. Furthermore, ex ante expected profits of the firms are higher when the foreign exchange market is more transparent. --

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    Bibliographic Info

    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 14/03.

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    Date of creation: 2003
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    Handle: RePEc:zbw:tuddps:1403

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    Related research

    Keywords: exchange rate risk; transparency; export production; futures markets;

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    1. Hirshleifer, Jack, 1975. "Speculation and Equilibrium: Information, Risk, and Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 89(4), pages 519-42, November.
    2. Broll, Udo & Wahl, Jack E. & Zilcha, Itzhak, 1995. "Indirect hedging of exchange rate risk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(5), pages 667-678, October.
    3. O. Cushman, David, 1986. "Has exchange risk depressed international trade? The impact of third-country exchange risk," Journal of International Money and Finance, Elsevier, Elsevier, vol. 5(3), pages 361-379, September.
    4. Viaene, Jean-Marie & de Vries, Casper G., 1992. "International trade and exchange rate volatility," European Economic Review, Elsevier, Elsevier, vol. 36(6), pages 1311-1321, August.
    5. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 509-524, June.
    6. Franke, Gunter, 1991. "Exchange rate volatility and international trading strategy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 10(2), pages 292-307, June.
    7. Wong, Kit Pong, 2002. "Production decisions in the presence of options: A note," International Review of Economics & Finance, Elsevier, Elsevier, vol. 11(1), pages 17-25, April.
    8. Cushman, David O., 1988. "U.S. bilateral trade flows and exchange risk during the floating period," Journal of International Economics, Elsevier, Elsevier, vol. 24(3-4), pages 317-330, May.
    9. Bernhard Eckwert & Itzhak Zilcha, 2003. "Incomplete risk sharing arrangements and the value of information," Economic Theory, Springer, Springer, vol. 21(1), pages 43-58, 01.
    10. Burkhard Drees & Bernhard Eckwert, 2003. "Welfare Effects of Transparency in Foreign Exchange Markets: the Role of Hedging Opportunities," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 453-463, 08.
    11. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 71-106, February.
    12. Eckwert, Bernhard & Broll, Udo, 1998. "International Trade and the Risk Premium in the Currency Forward Market," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 13, pages 662-672.
    13. Moschini, GianCarlo & Hennessy, David A., 2001. "Uncertainty, Risk Aversion, and Risk Management for Agricultural Producers," Staff General Research Papers 5323, Iowa State University, Department of Economics.
    14. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, Elsevier, vol. 34(3-4), pages 269-287, May.
    15. Eckwert, Bernhard & Zilcha, Itzhak, 2001. "The Value of Information in Production Economies," Journal of Economic Theory, Elsevier, Elsevier, vol. 100(1), pages 172-186, September.
    16. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, Elsevier, vol. 20(1-2), pages 83-98, February.
    17. Udo Broll & Bernhard Eckwert, 1999. "Exchange Rate Volatility and International Trade," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 178-185, July.
    18. Kit Pong Wong, 2001. "Currency Hedging For Export-Flexible Firms," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(1), pages 165-174.
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