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Over the Hedge: Do Exporters Practice Selective Hedging?

Author

Listed:
  • Richard Fabling

    () (Motu Economic and Public Policy Research)

  • Arthur Grimes

    () (Motu Economic and Public Policy Research and University of Auckland)

Abstract

What determines exporters’ exchange rate hedging decisions and do exporters attempt to “time the market”? We use a unique unit record longitudinal administrative dataset on firm exports to find the determinants of exporters’ currency hedging choices. Determinants include financial fragility, prior hedging experience, and natural hedge opportunities. In addition, firms alter their hedging ratios when the currency has recently trended in one direction. We test whether such behaviour reflects firm characteristics (such as pricing power). We find that these responses are ubiquitous for all but large firms and for all times other than when the exchange rate is near its extreme high or low historical values. These results are consistent with most firms practicing selective hedging (market timing) behaviour that reflects a belief in exchange rate momentum effects. However, this behaviour appears sub-optimal since momentum effects are statistically absent from the underlying exchange rate data.

Suggested Citation

  • Richard Fabling & Arthur Grimes, 2014. "Over the Hedge: Do Exporters Practice Selective Hedging?," Working Papers 14_01, Motu Economic and Public Policy Research.
  • Handle: RePEc:mtu:wpaper:14_01
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    References listed on IDEAS

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    Cited by:

    1. Parker, Miles, 2016. "How exporters set prices: evidence from a large behavioural survey," Working Paper Series 1974, European Central Bank.
    2. Richard Fabling & Lynda Sanderson, 2015. "Exchange rate fluctuations and the margins of exports," Working Papers 15_05, Motu Economic and Public Policy Research.

    More about this item

    Keywords

    Currency hedging; optimal hedging; selective hedging; momentum trading;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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