Does the traditional exchange rate fully explain firms’ exposure?

ABSTRACT

This study aims to explore the role of the cross exchange rate as a form of market competition, which has previously been omitted as an explanatory variable in estimating the risk exposure of the standard exchange. To the end, we develop a model of exporting firms that reflects exposure to market interaction and mark-up in a duopolistic export market. Using monthly data of stock returns and cross exchange rates of two oligopoly industries (i.e. semiconductor and steel & iron), our empirical evidence supports our hypothesis that cross exchange rates significantly explain firm value.

KEYWORDS:

• Cross exchange rates
• exposure
• market interaction
• residual demand

JEL CLASSIFICATION:

• F30
• F31

Acknowledgement

This work was supported by Kyungpook National University A.S. Research Fund, 2014.

Disclosure statement

No potential conflict of interest was reported by the authors.