German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs

Abstract

This article analyses value changes of German stock market companies in response to movements of the US dollar. The approach followed in this work extends the standard means of measuring exchange rate exposure in several ways, e.g. by us-ing multi-factor modelling instead of augmented CAPM, application of moving window panel regressions, and orthogonalization of overall market risk vis-à-vis currency risk. A further innovation lies in testing theoretical implications of exchange rate adjustment costs (hedging costs) for firm values and economic exposure. Based on time series and panel data of German DAX companies, DM/ dollar rates and macroeconomic factors, we find a rather unstable, time-variant exposure of German stock market companies. Dollar sensitivity is positively affected by the ratio of exports/GDP and negatively af-fected by imports/GDP. Moreover, as expected from theoretical findings, firm values and exchange rate exposure are significantly reduced by adjustment costs depending on the distance of the exchange rate from the expected long-run meanexchange rate exposure, international trade, panel econometrics, adjustment costs