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Exchange rate exposure: A nonparametric approach

Listed author(s):
  • Uluc Aysun

    (University of Connecticut)

  • Melanie Guldi

    (Mount Holyoke College)

The typical conclusion reached when researchers examine exchange rate exposure using a linear model is that only a few firms are exposed. This finding is puzzling since institutional knowledge and basic finance theory points to a larger effect. In this paper, we compare results obtained using a linear approach with those from nonlinear, partially parametric and nonparametric models. Our data consist of nonfinancial firms in five emerging market countries and the US. Among firms that were not found to have a linear exposure, we find that a considerable proportion of these are exposed when nonlinear, partially parametric or nonparametric models are used. The increase in exposure is most striking when a nonparametric model is used. We also find evidence that firms' hedging activities decrease linear exposure but do not affect nonparametric exposure.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2009-18.

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Length: 32 pages
Date of creation: Jun 2009
Handle: RePEc:uct:uconnp:2009-18
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Web page: http://www.econ.uconn.edu/

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