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The dollar and the German stock market: determination of exposure to and pricing of exchange rate risk using APT-modelling

  • Entorf, Horst
  • Jamin, Gösta

We estimate the impact of dollar changes on the value of German DAX corporations, using APT-modelling for the period 1977 - 1995. Several macroeconomic risk factors, including the dollar and a residual market factor representing the general market risk, are specified. The general notion is that the export-oriented German companies should benefit from increasing dollar values. We find time-varying dollar exposure presumably depending on the prevailing trade regime. Dollar sensitivity is positive as expected in periods with a positive trade balance, whereas it turns negative in periods with a negative trade balance (e.g., in the first half of the 1980s). APT-modelling simultaneously considers exchange rate exposure and risk-premia of macroeconomic risk factors, the latter also being unstable over time.

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Paper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 20146.

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Date of creation: Dec 2003
Date of revision:
Publication status: Published in Darmstadt Discussion Papers in Economics . 127 (2003-12)
Handle: RePEc:dar:ddpeco:20146
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  1. Horst Entorf & Gösta Jamin, 2007. "German Exchange Rate Exposure at DAX and Aggregate Levels, International Trade and the Role of Exchange Rate Adjustment Costs," German Economic Review, Verein für Socialpolitik, vol. 8, pages 344-374, 08.
  2. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  3. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  4. Bartram, Sohnke M., 2004. "Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 673-699, June.
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