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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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  • 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

Suggested Citation

  • Entorf & Jamin, 2005. "German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs," International Finance 0508005, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0508005
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    Cited by:

    1. Asif, Raheel & Frömmel, Michael, 2022. "Exchange rate exposure for exporting and domestic firms in central and Eastern Europe," Emerging Markets Review, Elsevier, vol. 51(PA).
    2. Horst Entorf & Gösta Jamin, 2005. "The dollar and the German stock market: determination of exposure to and pricing of exchange rate risk using APTmodelling," The IUP Journal of Applied Economics, IUP Publications, vol. 0(6), pages 19-33, November.
    3. 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(3), pages 344-374, August.
    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. 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.
    6. repec:bor:iserev:v:12:y:2012:i:46:p:15-48 is not listed on IDEAS
    7. Jing Nie & Zhichao Zhang & Zhuang Zhang & Si Zhou, 2015. "Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 23(3), pages 97-109, May.
    8. Yener Coskun, 2010. "Why Turkish Securities Firms Have Not Transformed to Full Service Investment Banks?: An Assessment For the Near Future of the Turkish Securities Firms Industry," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(46), pages 15-48.
    9. Dranev Yury & Maxim Babushkin, 2014. "Asymmetric exchange-rate exposure in BRIC countries," HSE Working papers WP BRP 27/FE/2014, National Research University Higher School of Economics.
    10. 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.
    11. Udo Broll & Peter Welzel & Kit Pong Wong, 2016. "The Impact of Regret on Exports," German Economic Review, Verein für Socialpolitik, vol. 17(2), pages 192-205, May.
    12. repec:bla:germec:v:8:y:2007:i::p:344-374 is not listed on IDEAS
    13. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, University Library of Munich, Germany.
    14. Jayasinghe, Prabhath & Tsui, Albert K. & Zhang, Zhaoyong, 2014. "New estimates of time-varying currency betas: A trivariate BEKK approach," Economic Modelling, Elsevier, vol. 42(C), pages 128-139.
    15. Horst Entorf & Jochen Moebert & Katja Sonderhof, 2011. "The Foreign Exchange Rate Exposure of Nations," Open Economies Review, Springer, vol. 22(2), pages 339-353, April.
    16. Mevlud Islami & Paul Welfens, 2013. "Financial market integration, stock markets and exchange rate dynamics in Eastern Europe," International Economics and Economic Policy, Springer, vol. 10(1), pages 47-79, March.
    17. repec:bor:iserev:v:12:y:2012:i:46:p:49-83 is not listed on IDEAS
    18. Entorf, Horst & Moebert, Jochen & Sonderhof, Katja, 2007. "The foreign exchange rate rate exposure of nations," ZEW Discussion Papers 07-005, ZEW - Leibniz Centre for European Economic Research.
    19. Belghitar, Yacine & Clark, Ephraim & Dropsy, Vincent & Mefteh-Wali, Salma, 2021. "The effect of exchange rate fluctuations on the performance of small and medium sized enterprises: Implications for Brexit," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 399-410.
    20. Serkan Yilmaz Kandir & Ahmet Erismis, 2010. "Investigating Exchange Rate Exposure of Bank Shares: Empirical Evidence From ISE," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(46), pages 49-83.
    21. 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.
    22. Ali Alp & Unsal Ban & Kartal Demirgunes & Saim Kilic, 2010. "Internal Determinants of Profitability in Turkish Banking Sector," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(46), pages 1-14.
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    More about this item

    Keywords

    exchange rate exposure; international trade; panel econometrics; adjustment costs;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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