1 Exchange Rate Uncertainty and Firm Pro�tability

University of Liverpool Liverpool, United Kingdom
Journal of Macroeconomics (Impact Factor: 0.62). 02/2001; 23(4):565-576. DOI: 10.1016/S0164-0704(01)00178-1
Source: RePEc


This paper investigates the effects of permanent and transitory components of the exchange rate onf firms' profitability under imperfect information. Utilizing a signal extraction framework, we show that the variances of these components of the exchange rate process will have indeterminate effects on the firm's growth rate of profits, but will have predictable effects on its volatility. An increase in the variance of the permanent (transitory) component in the exchange rate process leads to greater (lesser) variability in the growth rate of the firm's profits, thus establishing that the source of exchange rate volatility matters in analyzing its effects. Implications of our theoretical findings for the empirical modeling of the underlying relationships are discussed.

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Available from: Christopher Baum, Mar 11, 2014
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    • "These findings motivate OPEC's interest to seek member nation economic success by investigating alternatives to the pricing of crude oil in US dollars. Exchange rate volatility in global trade creates uncertainty in pricing imports and exports (Rose, 2000), impacting profitability (Baum et al., 2001) and discourages or delays production and employment investment decisions (Belke and Gros, 2002). A solution against exchange rate volatility is a diversified risk currency basket, which serves as an instrument of stabilization (Horne and Martin, 1989) and as a monetary policy mechanism (Bird and Rajan, 2002) that may also serve a particular country's or organization's self-interest (Hochreiter et al., 2003). "
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    ABSTRACT: This study offers Organization of Petroleum Exporting Countries (OPEC) member nations a crude oil pricing currency basket based on currency liquidity, in contrast with prior emphasis on OPEC trading patterns. Motivating the search for an alternative US dollar pricing of crude oil is the significant and inverse relationship (r=-0.82, p<0.01) between the US dollar major currencies index and crude oil price over the period January 1999-March 2009. A dynamically weighted petro-dollar currency basket is proposed based on the five currency claims (US dollar, Euro, British pound, Japanese yen and Swiss franc) and their varying proportions of foreign exchange reserves held by central banks. The major currencies US dollar index is compared against the proposed petro-dollar index to reveal an average US$8.1 billion annual gain in favor of the petro-dollar currency basket, offering OPEC members a revenue stream of diversified and highly liquid currencies to transition away from complete dependence on the US dollar crude oil pricing. The proposed petro-dollar crude oil pricing schema offers OPEC a crude oil price dynamically denominated in currencies reflecting the global use and importance of crude oil. This paper concludes with implementation issues facing a move toward the dynamically weighted petro-dollar crude oil pricing schema.
    Energy Policy 04/2010; 38(4):1938-1945. DOI:10.1016/j.enpol.2009.11.074 · 2.58 Impact Factor
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    • "1 Jorion (1990), Amihud (1993), Bartov and Bodnar (1994), and Bartov et al. (1996) focusing on the US multinational firms, for example, find a negative effect of uncertainty and volatility on firm profitability. On the theoretical front, Shapiro (1974) and Dumas (1978) show a negative effect of exchange rate uncertainty and volatility on firm profitability, while Baum et al. (2001) point out an indeterminate effect of volatility on profit growth rates. "
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    ABSTRACT: Using semi-annual data from 1993 to 2003 for all publicly traded manufacturing firms in Turkey, this paper explores the impacts of macroeconomic uncertainty and external shocks on profitability of real sector firms in the presence of multiple investment options in both real and financial sectors. The paper argues that increasing availability and accessibility of investment opportunities in the financial markets help real sector firms sustain profit margins despite market rigidities, increasing goods market competition, or higher levels of risks. The empirical results based on dynamic panel estimations show that increasing macroeconomic uncertainty and volatility have a significantly negative effect on firm profitability. In contrast, increasing the share of financial investments in total assets is found to be reducing such negative effects at a statistically and economically significant level. Copyright © 2009 Blackwell Publishing Ltd.
    Review of Development Economics 11/2009; 13(4):592-609. DOI:10.1111/j.1467-9361.2009.00522.x · 0.69 Impact Factor
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    • "Exchange rate volatility, for instance, creates uncertainty for the prices of exports and imports, and thereby significantly affects international trade flows (see e.g., Caporale and Doroodian, 1994; Rose, 2000). Several studies have shown that exchange rate volatility has a major impact on the profitability of multinational firms, and consequently, also on stock prices (see e.g., Jorion, 1990; Bailey and Chung, 1995; Dumas and Solnik, 1995; Baum et al., 2001). Moreover, since increasing exchange rate volatility tends to discourage investment decisions, it may also have an adverse effect on industrial production and employment (see e.g., Belke and Gros, 2002). "
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    ABSTRACT: This paper examines linkages in expected future volatilities among major European currencies. For that purpose, volatility expectations implied by currency options on the euro, British pound, and Swiss franc quoted against the U.S. dollar are analysed. Vector autoregressive modelling is applied to ascertain the dynamics of the implied volatilities across currencies. The results show that the market expectations of future exchange rate volatilities are closely linked among major European currencies. Furthermore, it is found that the implied volatility of the euro significantly affects the volatility expectations of the British pound and the Swiss franc.
    Journal of International Financial Markets Institutions and Money 02/2006; 16(2):87-103. DOI:10.1016/j.intfin.2004.12.007 · 0.89 Impact Factor
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