Article

Exchange Rate Uncertainty and Firm Profitability

Boston College Chestnut Hill, Massachusetts, USA; Mustafa Caglayan; University of Liverpool Liverpool, United Kingdom; John T. Barkoulas; Louisiana Tech University Ruston, Louisiana, USA
Journal of Macroeconomics 02/2001; 23(4):565-576. DOI: 10.1016/S0164-0704(01)00178-1
Source: RePEc

ABSTRACT 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.

0 Bookmarks
 · 
100 Views
  • [Show abstract] [Hide abstract]
    ABSTRACT: This article analyzes the impact of movements in the Australian dollar/Japanese yen (AUDJPY) and the Australian dollar/US dollar (AUDUSD) exchange rates on the returns of the Australian equities market. Specifically, this paper investigates the nature of exchange rate exposure across increasing return measurement intervals, enabling an examination of both its short-term and its long-term effect on stock returns. Consistent with previous literature, considerable evidence of long-term exchange rate exposure is found. Further, it is found that in the long-term the Australian equities market in general is exposed to fluctuations in the AUDJPY, while only some Australian industries are exposed to movements in the AUDUSD. Finally, convincing evidence in terms of the determinants of foreign exchange exposure is not found (JEL G12, G15).
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Using bi-annual data from 1993 to 2003 for 172 manufacturing firms in Turkey, the paper explores the impacts of macroeconomic uncertainty, country risk and external shocks on profitability of real sector firms after controlling for the share of financial investments in total assets. Based on a portfolio choice model we ague that in order to sustain profit margins in the face of higher risks, uncertainty and competition real sector firms increasingly invest on liquid financial assets rather than long term fixed assets. Thus, while we expect a negative relationship between risk and uncertainty, and firm profitability, the effect is anticipated to be asymmetric based on the share of financial investments in total asset allocation. The empirical findings based on dynamic panel estimation techniques confirm that increasing uncertainty, country risk, real interest rates and capital flow volatility have a significantly negative effect on manufacturing firm profitability. In contrast, increasing short-term financial investments are found to be reducing the negative effects of risk, volatility and higher interest rates at a significant level. Overall, firms appeared to be using short-term investments as a way of hedging against risks and uncertainties in the market.
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This paper examines the characteristics of short-term fluctuations/volatility of the South African exchange rate and investigates whether this volatility has affected the South Africa's exports flows. In particular the paper investigates the impact of exchange rate volatility on aggregate South African exports flows to the rest of the world, as well as on South African goods, services and gold exports. The ARDL bounds testing procedures developed by Pesaran et al. (2001) were employed on quarterly data for the period 1984 to 2004. The results suggest that, depending on the measure of volatility used, either there exist no statistically significant relationship between South African exports flows and exchange rate volatility or when a significant relationship exists, it is positive. No evidence of a long run gold and services exports demand relations were found. These results are however not robust as they show great amount of sensitivity to different definitions of variables used.

Full-text (2 Sources)

Download
11 Downloads
Available from
May 21, 2014