Exporters’ Exposures to Currencies: Beyond the Loglinear Model*

Abstract

We extend the constant-elasticity regression that is the default choice when equities’ exposure to currencies is estimated. In a proper real-option-style model for the exporters’ equity exposure to the foreign exchange rate, we argue, the convexity of the relationship implies that the elasticity should depend on the exchange rate level. For instance, it should shrink to zero when the option to export becomes worthless, and that should happen at a critical exchange rate that is still strictly positive. We propose a class of tractable multi-regime regression models featuring, in line with the real-options logic, smooth transitions and within-regime dynamics in the foreign exchange exposure. We then analyze the exchange rate exposure of Chinese exporting firms and find that the model in which the moneyness of the export option has a positive impact on the exchange rate exposure detects a significantly positive and convex exposure for 40% and 65% of the firms depending on whether the market return is included in the regression or not.

Jockeying for Position in CEO Letters: Impression Management and Sentiment Analytics

“…It has been used by Andersen, Bollerslev, and Cai (2000) and Boudt, Croux, and Laurent (2011), among others, to describe the U-shaped patterns in intraday volatility of stock prices and exchange rates. 16 The least squares estimator of the threshold parameter is known to be superfast convergent (see, e.g., Chan [1993] and Hansen [2000] for the asymptotic distribution, and, e.g., Boudt, Liu, and Sercu [2016] for a recent application to the modeling of time-varying parameters). the value of the parameter vector θ .…”

“…The least squares estimator of the threshold parameter is known to be superfast convergent (see, e.g., Chan [] and Hansen [] for the asymptotic distribution, and, e.g., Boudt, Liu, and Sercu [] for a recent application to the modeling of time‐varying parameters).…”

The response of multinationals’ foreign exchange rate exposure to macroeconomic news

“…rate: (i) the sign of the change in the foreign exchange rate (see, e.g., Bartram, 2004, Bartram and Bodnar, 2012, Chaieb and Mazzotta, 2013, Koutmos and Martin, 2007, (ii) the squared change in the foreign exchange rate (see, e.g., Muller and Verschoor, 2006) and (iii) the 'moneyness' of the option to export, that is, the accumulated recent exchange rate changes as in Boudt et al (2015). The second group of controls consists of dummies for one-off events.…”

“…This exchange rate exposure varies over time, is not directly observable, and therefore is challenging to estimate (see Jorion, 1990, Boudt et al, 2015. Variations may reflect changes in the firm's activities or the characteristics of the industry or the nature of the structural shocks to foreign exchange markets.…”

“…Variations may reflect changes in the firm's activities or the characteristics of the industry or the nature of the structural shocks to foreign exchange markets. Previous empirical work has dealt with time variation either by splitting the sample (e.g., Jorion, 1990, Williamson, 2001), using rolling windows (e.g., Glaum et al, 2000) or by modelling exchange rate dynamics (e.g., Boudt et al, 2015).…”