Exchange Rate Risk and the Impact of Regret on Trade

Udo Broll (), Peter Welzel () and Kit Wong ()

Open Economies Review, 2015, vol. 26, issue 1, 109-119

Abstract: This paper examines the behavior of the regret-averse firm under exchange rate uncertainty. Regret-averse preferences are characterized by a modified utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the conventional results that the firm optimally produces less, sells more domestically, and export less abroad under uncertainty than under certainty holds if the firm is not too regret-averse. Using a binary model wherein the random spot exchange rate can take on either a low value or a high value with positive probability, we show that the conventional results may not hold, particularly when the firm is sufficiently regret-averse and the low spot exchange rate is very likely to prevail. Copyright Springer Science+Business Media New York 2015

Keywords: Exchange rate risk; Exporting; Regret theory; D81; F23; F31 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s11079-014-9321-0

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