Download This PaperHow Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?
67 Pages Posted: 1 Jan 2016 Last revised: 9 Aug 2022
Date Written: November 26, 2020
Abstract
Past research has suggested 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% 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, particularly 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.
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CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )
Poschinger Str. 5
Munich, DE-81679
Germany
Swiss Finance Institute
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
Christoph Herpfer
University of Virginia, Darden School ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium