Exchange rate volatility and trade responsiveness of international firms

Udo Broll, Soumyatanu Mukherjee and Rudra Sensarma
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Udo Broll: Technische Universita ?t Dresden, Germany

No 212, Working papers from Indian Institute of Management Kozhikode

Abstract: This paper analyses, for the first time, trade responsiveness of the international firms (under nohedging possibilities) linked to both domestic and foreign markets simultaneously, with respect to the random fluctuations in foreign (spot) exchange rates. Uncertainties in the spot exchange rates impart production decisions of the firm. In sum, the firm’s elasticity of risk aversion with respect to the standard deviation (or the mean) of the firm’s end-period random profit determines the direction of the impact of exchange rate volatility on trade. The analytical model is quantitatively extended, using data from Indian service sector (non-financial) firms over 2004-2015, to empirically estimate the risk-aversion elasticities owing to the exchange rate shocks, for the first time.

Keywords: Two-moment model; exports; imported intermediate inputs; exchange rate volatility; revenue risk; elasticities of risk aversion. (search for similar items in EconPapers)
JEL-codes: D21 D81 F10 F31 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2016-12
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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