Exchange rate exposure and real exports

Abstract

This study investigates the relationship between real exports and exchange rate risk for Turkish firms between 2001 and 2003. Different from earlier studies, the analysis is conducted at the firm level with an exchange rate risk specific to the individual firm. Results show that real exports are negatively impacted by an increase in exchange rate risk. In addition, size of the trade volume and the dependence on domestic market for revenue generation are found to be important for the aforementioned relationship.

Acknowledgements

I would like to thank participants of a seminar at TOBB University, especially to Dr Ümit Özlale, for their valuable comments.

Notes

¹ Weekly prices are obtained by taking weekly averages of daily prices.

² Index includes 100 firms traded in Istanbul Stock Exchange.

³ Majority of firms in the sampel are in manufacturing.

⁴www.ise.gov.tr

⁵ For a survey on exchange rate exposure, see Muller and Verschoor (2006).

⁶ A portfolio consisting of Euro and USD with equal weights is used in the analysis. However, using Euro only or USD only does not lead to any significant changes in the findings.

⁷ Since price of foreign currency in terms of local currency is used, a positive β_s coefficient indicates a positive change in the firm value due to depreciation in the local currency.

⁸ That is, 2000–2001 information is used to estimate the exposure β for 2001, and information for 2000–2002 is used to estimate exposure β for year 2002, and so on.

⁹ GDP value of industrialized countries is used.

¹⁰ CPI for industrialized countries is used to measure foreign prices.

¹¹ When exposure equals zero, firm value will not be impacted by exchange rate changes. At the same time, an exposure β of one or negative one indicates the same exposure level. Only the change in firm value is impacted differently: in one case by an appreciation of a currency, and in other by a depreciation of the currency.

¹² To calculate this risk measure, same portfolio of USD and Euro is used as in Specification 1.

¹³ Given that the relative price, the income measure for importing countries, and the exchange rates do not change from firm-to-firm, it is impossible to include all in one equation. Therefore, our dependent variable is regressed individually on these variables and information that is not captured by them is used as the dependent variable in the final Equation.

¹⁴ The null hypothesis states no correlation, thus low values of the Hausman's χ² test suggest statistical preference for a random effects model specification. It suggests that the differences between firms are not just parametric shifts of the regression function, and hence it is more appropriate to view firm specific constant terms as randomly distributed across firms.

¹⁵ Of course, this will be true when hedging or shifting exports to another market, including domestic market, are not possible. This is the third country effect dicussed by Cushman (1986).