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

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 multifactor modelling instead of augmented Capital Asset Pricing Model, application of moving window panel regressions and orthogonalization of overall market risk vis-à-vis currency risk. A further innovation lies in testing the theoretical implications of exchange rate adjustment costs (hedging costs) for firm values and economic exposure. Based on time series and panel data of German Deutsche Aktien Xchange companies, Deutsche Mark/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/gross domestic product (GDP) and negatively affected 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. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2007.

Sources of time-varying exchange rate exposure

“…Thus, the variance may be readily mistaken for zero. In addition, evidence reported in earlier empirical studies implies that, in the case of Germany, exchange rate exposure was not constant over time (Entorf and Jamin 2007). We focus in the remainder of this paper on the filtered estimates.…”

Does a trade surplus raise the exchange rate exposure? A perspective on Sino-US relations

“…The dynamic relation between these two series was demonstrated over the past decade by the fact that the global financial crisis and policy changes may have led to some structural disruption in the global foreign exchange markets. Entorf and Jamin (2007) proved that the impact of TS on ERE is rather unstable and time-varied. Pierdzioch and Kizys (2010) also noted that the causal relationship between TS and ERE may have time-varying changes, which depends on the ability of exporters to absorb foreign exchange losses.…”

Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence

“…Using daily data of stock indexes and the dollar exchange rate during 1994 to 2003, they find unidirectional causation running from stock prices to exchange rates in Mexico, Argentina and Brazil, but running from exchange rates to stock prices in Malaysia and Thailand. Entorf and Jamin (2007) estimate a time-varying measure of overall German currency risk and propose that it depends significantly on both German exports and imports. Using data from 28 German DAX companies, they confirm that the German mark/US dollar rate is positively affected by the ratio of exports to GDP and negatively affected by imports to GDP.…”