nep-ifn New Economics Papers
on International Finance
Issue of 2008‒01‒12
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Corporate Cash Flow and Stock Price Exposures to Foreign Exchange Rate Risk By Bartram, Söhnke M.
  2. Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets By Bartram, Söhnke M.
  3. Estimating Exchange Rate Equations Using Estimated Expectations By Ray C. Fair
  4. Exchange Rate Pass-Through and Structural Macroeconomic Shocks in Developing Countries: An Empirical Investigation. By barhoumi, karim
  5. Does the IMF Help or Hurt? The Effect of IMF programs on the likelihood and outcome of currency crises By Axel Dreher; Stefanie Walter
  6. What Lies Beneath: Foreign Exchange Rate Exposure, Hedging and Cash Flows By Bartram, Sohnke M.
  7. exchange rate policy and income distribution in an open developing economy By tropeano, d; michetti, e

  1. By: Bartram, Söhnke M.
    Abstract: This paper estimates the foreign exchange rate exposure of 6,917 U.S. nonfinancial firms on the basis of stock prices and corporate cash flows. The results show that several firms are significantly exposed to at least one of the foreign exchange rates Canadian Dollar, Japanese Yen and Euro, and significant exposures are more frequent at longer horizons. The percentage of firms for which stock price and earnings exposures are significantly different is relatively low, though it increases with time horizon. Overall, the impact of exchange rate risk on stock prices and cash flows is similar and determined by a related set of economic factors.
    Keywords: corporate finance; risk management; exposure; foreign exchange rates; hedging
    JEL: F4 F3 G3
    Date: 2007–05–07
  2. By: Bartram, Söhnke M.
    Abstract: This paper examines the importance of exchange rate exposure for firm-level stock returns based on a large sample of non-financial firms from 37 countries. Because of the impact of exchange rates on firm value we argue that any predictable relation between exchange rate exposure and return will be conditional. We show strong evidence for a return premium to a firm’s currency exposure conditional on the exchange rate change. The return premium is directly related to the interaction between exchange rate exposure and the realized exchange rate change, suggesting the fluctuations in exchange rates themselves as a source for the previously identified time-variation in currency risk premia. The return premium to currency exposure is largest for firms in emerging markets, while it is statistically significant in developed markets only for local currency depreciations. Its magnitude ranges from 2.5% to 8.0% (p.a.) per unit of exposure depending on the sample, indicating that exchange rate exposure plays an important role in explaining cross-sectional return variation.
    Keywords: exchange rate exposure; exchange rate risk; return premia; international finance
    JEL: F4 G1 F3 G3
    Date: 2007–05–01
  3. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper takes a somewhat different approach from the recent literature in estimating exchange rate equations. It assumes uncovered interest rate parity and models how expectations are formed. Agents are assumed to base their expectations of future interest rates and prices, which are needed in the determination of the exchange rate, on predictions from a ten equation VAR model. The overall model is estimated by FIML under model consistent expectations. The model generally does better than the random walk model, and its properties are consistent with observed effects on exchange rates from surprise interest rate and price announcements. Also, the focus on expectations is consistent with the large observed short run variability of exchange rates.
    Keywords: Exchange rate equations, Uncovered interest rate parity
    JEL: F31
    Date: 2008–01
  4. By: barhoumi, karim
    Abstract: This paper investigates the exchange rate pass-through in 12 developing countries during the period 1980-2001 by adopting a new formulation . Rather than considering the traditional approach based on the exogenous exchange rate movement through correlation between exchange rate and prices, we focus on fundamental macroeconomic shocks that a¤ect both exchange rate and prices. In order to do that, we employ long-run restrictions à la Blanchard and Quah (1989) to identify the di¤erent shocks through an open economic macroeconomic model (ISLM framework). We use two empirical methodology : Structural VECM methodology used by Jang and Ogaki (2004) and the common trends approach proposed by Warne et al (1992). This allows us to calculate the pass-through as the responses of the exchange rate, CPI and import prices to the supply, the relative demand, the nominal and the foreign prices shocks. We show that the pass-through ratio in developing countries is di¤erent when considering di¤erent structural shocks.
    Keywords: Exchange rate pass-through; Developing countries; Long-run restrictions; Structural VECM; Common trend; Impulse response functions
    JEL: C32 E31 F31
    Date: 2006–10
  5. By: Axel Dreher (KOF Swiss Economic Institute, ETH Zurich); Stefanie Walter (University of Zurich, Institute for Political Science, and ETH Zurich, Switzerland)
    Abstract: Using panel data for 68 countries over the period 1975-2002 this paper examines how IMF programs, disbursed loans, and compliance with conditionality affect the risk of currency crises and the outcome of such crises. Specifically, we investigate whether countries with previous IMF intervention are more likely to experience currency crises. In a second step, we analyze the IMF’s impact on a country’s decision to adjust the exchange rate, once a crisis occurred. We find that IMF involvement reduces the probability of a crisis. Once in a crisis, IMF programs significantly increase the probability that the authorities devalue the exchange rate. The amount of loans and compliance with conditionality have no impact. Our results suggest that the IMF – contrary to the Fund’s critics – does indeed fulfill its functions of promoting exchange rate stability and helping its members to correct macroeconomic imbalances.
    Keywords: IMF programs, growth, compliance, conditionality
    JEL: F33 F34 O57
    Date: 2008–01
  6. By: Bartram, Sohnke M.
    Abstract: This paper presents results from an in-depth analysis of the foreign exchange rate exposure of a large nonfinancial firm based on proprietary internal data including cash flows, derivatives and foreign currency debt, as well as external capital market data. While the operations of the multinational firm have significant exposure to foreign exchange rate risk due to foreign currency-based activities and international competition, corporate hedging mitigates this gross exposure. The analysis illustrates that the insignificance of foreign exchange rate exposures of comprehensive performance measures such as total cash flow can be explained by hedging at the firm level. Thus, the residual net exposure is economically and statistically small, even if the operating cash flows of the firm are significantly exposed to exchange rate risk. The results of the paper suggest that managers of nonfinancial firms with operations exposed to foreign exchange rate risk take savvy actions to reduce exposure to a level too low to allow its detection empirically.
    Keywords: Foreign exchange rates; exposure; risk management; cash flow; derivatives; corporate finance
    JEL: F4 F3 G3
    Date: 2007–07–31
  7. By: tropeano, d; michetti, e
    Abstract: In this work we are going to deal with the issue of distribution of income in an open economy within a simplified macroeconomic model with constant prices.this type of model could apply to middle-income developing countries, which have succeeded in fighting inflation through a policy of high interest rates.It will be assumed that the implicit target of monetary policy now becomes the exchange rate and interest rates are set to a high level to lower the exchange rate. Even if this strategy may work it may produce negative effects on output growth and the distribution of income.The lowering of the exchange rate target would have the following effects on distribution.It would cause a reduction in the growth of output,it would lower the wage rate.Domestically-produced income distributed abroad should increase instead.The domestic interst rate would rise only for suitable small values of the parameter which links imports to income.The effect on the profit share is indeed uncertain.
    Keywords: exchange rate policy balance of payments income distribution developing countries
    JEL: F40
    Date: 2008–01

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