Exporters' Exposures to Currencies: Beyond the Loglinear Model

Review of Finance, 20, 1631-1657, 2014

36 Pages Posted: 8 Apr 2012 Last revised: 21 Nov 2017

See all articles by Kris Boudt

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Fang Liu

Central University of Finance and Economics, Beijing

Piet Sercu

FEB at KU Leuven

Date Written: August 5, 2014


We extend the constant-elasticity regression that is the default choice when equities' exposure to currencies is estimated. In a proper real-option-style model for the exporters' equity exposure to the foreign exchange rate, we argue, the convexity of the relationship implies that the elasticity should depend on the exchange rate level. For instance, it should shrink to zero when the option to export becomes worthless, and that should happen at a critical exchange rate that is still strictly positive. We propose a class of tractable multi-regime regression models featuring, in line with the real-options logic, smooth transitions and within-regime dynamics in the foreign exchange exposure. We then analyze the exchange rate exposure of Chinese exporting firms and find that the model in which the moneyness of the export option has a positive impact on the exchange rate exposure detects a significantly positive and convex exposure for 40% and 65% of the firms depending on whether the market return is included in the regression or not.

Keywords: Forex, exposure, real options, threshold model

JEL Classification: C13, C22, G11

Suggested Citation

Boudt, Kris and Liu, Fang and Sercu, Piet M. F. A., Exporters' Exposures to Currencies: Beyond the Loglinear Model (August 5, 2014). Review of Finance, 20, 1631-1657, 2014, Available at SSRN: https://ssrn.com/abstract=2035347 or http://dx.doi.org/10.2139/ssrn.2035347

Kris Boudt (Contact Author)

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000

Vrije Universiteit Brussel ( email )

Pleinlaan 2
Brussels, 1050

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV

Fang Liu

Central University of Finance and Economics, Beijing ( email )

39 South College Road, Beijing
Beijing, 100081

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

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