Exposure and Markups

Posted: 10 Mar 2000

See all articles by George Allayannis

George Allayannis

University of Virginia - Darden School of Business

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Abstract

This paper examines how to properly specify and test for factors that affect exchange-rate exposure. We develop a theoretical model, which explicitly identifies three channels of exposure: a) a positive effect through the competitive structure of the markets where final output is sold; b) a positive effect through the interaction of the competitive structure of the export market and the share of production that is exported; and c) a negative effect through the interaction of the competitive structure of the imported input market and the share of production that is imported. Using a sample of 82 U.S. manufacturing industries at the 4-digit SIC level, classified in 18 2-digit industry groups, between 1979 and 1995, we estimate exchange-rate exposure as suggested by our model. We find that approximately 4 out of 18 industry groups are significantly exposed to exchange-rate movements through at least one channel of exposure. On average, a 1 percent appreciation of the dollar decreases the return of the average industry by 0.13 percent. Consistent with our model's predictions, as industries become more (less) competitive, their exchange-rate exposure increases (decreases).

JEL Classification: F23, F31

Suggested Citation

Allayannis, George and Ihrig, Jane E., Exposure and Markups. Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=214530

George Allayannis

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

Jane E. Ihrig (Contact Author)

Federal Reserve Board - International Financial Transactions ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

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