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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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  • Jamin, Gösta
  • Entorf, Horst

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 using multi-factor modelling instead of augmented CAPM, application of moving window panel regressions, orthogonalization of overall market risk vis-?-vis currency risk). The main innovation lies in testing implications of exchange rate adjustment costs (hedging costs) for firm values and exposure. Based on time series 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 affected by imports/GDP as well as by significant deviations of the dollar price from its long-run median. The first two findings are in line with the presumption that exporting corporations benefit from dollar price increases, whereas importing corporations benefit from dollar price decreases. The last finding can be explained by higher exchange rate adjustment costs in case of substantial deviations from the long-run median level. Furthermore, there is indication of asymmetric adjustment costs as effects from appreciations of domestic currency appear to be smaller than from depreciations.

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  • Jamin, Gösta & Entorf, Horst, 2004. "German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs," ZEW Discussion Papers 04-03, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:1604
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    Cited by:

    1. 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, pages 19-33.
    2. 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.
    3. Prabhath Jayasinghe & Albert K. Tsui, 2009. "Time-Varying Currency Betas: Evidence from Developed and Emerging Markets," SCAPE Policy Research Working Paper Series 0903, National University of Singapore, Department of Economics, SCAPE.
    4. Entorf, Horst & Moebert, Jochen & Sonderhof, Katja, 2007. "The foreign exchange rate rate exposure of nations," ZEW Discussion Papers 07-005, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. 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.
    6. 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.
    7. Muller, Aline & Verschoor, Willem F.C., 2006. "Foreign exchange risk exposure: Survey and suggestions," Journal of Multinational Financial Management, Elsevier, pages 385-410.
    8. Gamini Premaratne & Prabhath Jayasinghe, 2005. "Exchange rate exposure of stock returns at firm level," International Finance 0503004, EconWPA.
    9. 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.
    10. repec:dau:papers:123456789/15237 is not listed on IDEAS

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    JEL classification:

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

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