Exchange Rate Exposure of Chinese Firms at the Industry and Firm level

Tang, Bo (2014): Exchange Rate Exposure of Chinese Firms at the Industry and Firm level. Published in: Review of Development Economics , Vol. 19, No. 3 (15 July 2015): pp. 592-607.

Abstract

This study investigates the exchange rate exposure of Chinese firms at the industry and firm level based on the conventional capital asset pricing model (CAPM) framework. At the industry level, the dynamic conditional correlation MGARCH (DCC MGARCH) estimates demonstrate that the market model and three-factor model are appropriate for exposure measurements, and industry returns are more likely to be exposed to unanticipated changes in the real exchange rate and the trade-weighted effective exchange rate, particularly for manufacturing industries. At the firm level, although the seemingly unrelated regression (SUR) estimates vary across markets, it is apparent that there is a relationship between firm size and exposure effects, which also show that lagged exchange rate changes have significant exposure effects on firm returns. This study finally suggests that non-financial firms should set up special commissions to hedge currency risks of their future cash flows.

• Item Type: MPRA Paper
• Language: English
• Keywords: exchange rate exposure, Chinese firms, industry and firm level, dynamic conditional correlation MGARCH (DCC MGARCH), seemingly unrelated regression (SUR).
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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