German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs

39 Pages Posted: 24 Dec 2003

See all articles by Horst Entorf

Horst Entorf

Leibniz Institute for Financial Research SAFE; IZA Institute of Labor Economics

Goesta Jamin

Ludwigshafen University of Applied Sciences

Date Written: August 11, 2005

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, 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.

Keywords: Exchange rate exposure, hedging, mean reversion, panel data

JEL Classification: G15, F31, C23

Suggested Citation

Entorf, Horst and Jamin, Goesta, German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs (August 11, 2005). Available at SSRN: https://ssrn.com/abstract=910918 or http://dx.doi.org/10.2139/ssrn.480142

Horst Entorf (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Goesta Jamin

Ludwigshafen University of Applied Sciences ( email )

East Asia Institute
Rheinpromenade 12
Ludwigshafen, 67061
Germany

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