Macroeconomic News and Risk Exposure to Foreign Exchange Rate Evidence from Chinese Listed Firms

ABSTRACT

This paper estimates the exchange rate exposure of Chinese listed firms across industries and tests whether their risk exposure to foreign exchange rates is shaped by macroeconomic news. Using a sample of 2321 Chinese listed firms from 2007 to 2020, we use six alternative models to estimate firms’ exposure to foreign exchange risk and their variations following macroeconomic news. We find that the risk exposure to foreign exchange rates significantly responds to macroeconomic news. The response is larger to news about GDP and international trade, and the response is particularly strong during the times of the Global Financial Crisis, the US-China trade war and the outbreak of COVID-19. Across different currencies, firms are more sensitive to the US dollar exchange rate risk. Across different industries, firms in technology-intensive industries are more sensitive to foreign exchange risk. Overall, the findings in this paper shed light upon the risk management of multinational firms in emerging markets.

KEYWORDS:

• Exchange rate risk exposure
• foreign exchange risk
• macroeconomic news

JEL:

• O24
• G30
• G15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Empirical literature that describes the estimation procedure about firm-level exchange rate risk exposure include Allayannis, Ihrig, and Weston (2001), Allayannis and Ofek (2001), Dominguez and Tesar (2006), Jorion (1990), Jorion (1991), Bartram (2004), Bartram, Brown, and Minton (2010), Bartram and Bodnar (2012), He, Liu and Zhang (2021a), Hutson and Laing (2014).

2. Note that increasing the frequency of data does not necessarily indicate that the estimates would come with smaller standard deviation because higher-frequency data may be with more noise that confound the overall statistical pattern.

3. We thank the anonymous referee for suggesting that we should apply the oil price model as the benchmark model.

4. We also use the oil-price model to conduct robust tests, the results remain qualitatively similar, consistent with the fact that in Table 6, the estimates about firms’ risk exposures to the US Dollar-Chinese RMB exchange rate are similar using the AD model to using the oil-price model.

Additional information

Funding

This research is supported by the National Social Science Foundation of China (19AJY028, 20ZDA053), the Fundamental Research Funds for Central Universities in China (No.2072021122), and by the Young Scholar Project of Natural Science Foundation of China (No. 7210020725).