How Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?
65 Pages Posted: 1 Jan 2016 Last revised: 1 Dec 2020
Date Written: November 26, 2020
Past research suggests that firms can significantly reduce their exposure to moderate exchange rate fluctuations by means of pass-through and hedging. Studying the appreciation of the Swiss franc by 17 percent on January 15, 2015, we show that firms remain exposed to extreme currency events. Pass-through, a way to share the costs of exchange rate risk with foreign customers, fails after extreme exchange rate shocks, in particular in competitive industries. Firms' exposure to currency tail risk has real consequences for their investment. The decrease in investment is explained by a reduction in profitable investment opportunities and not by financial constraints.
Suggested Citation: Suggested Citation