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Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach

Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach
Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach
This paper studies characteristics of optimal investment decisions of risk-averse firms who engage in exports under two types of risks: endogenous and background risks. While endogenous risk arises from the fluctuations in spot exchange rate and affects directly the profit of an exporting firm, background risk arises from uncertain changes in firm- and industry- specific domestic and foreign policies. We propose a mean-variance decision-theoretic model to trace out impact of perturbations in the distributions of these uncertainties on the optimal investment strategy. A testable empirical model is derived and applied to a panel of 840 exporting Indian manufacturing firms for the period 1995-2015. Our results suggest that Indian manufacturing exporters depict decreasing absolute risk aversion and that firms’ risk preferences are prone to variance vulnerability.
Background risk, Investment decision, Mark-up estimation, Risk aversion elasticities, Spot exchange rate risk
1351-847X
752-773
Mukherjee, Subhadip
33971739-aea2-460f-b802-9e63ecb2c5e5
Mukherjee, Soumyatanu
3eb37c57-3efd-4203-a81b-de3acad02811
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Broll, Udo
b1378af8-abfd-40c4-a152-d75d4af12233
Parhi, Mamata
5e489f1d-9fe0-44b3-8027-bfa3ec6bfbd4
Mukherjee, Subhadip
33971739-aea2-460f-b802-9e63ecb2c5e5
Mukherjee, Soumyatanu
3eb37c57-3efd-4203-a81b-de3acad02811
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Broll, Udo
b1378af8-abfd-40c4-a152-d75d4af12233
Parhi, Mamata
5e489f1d-9fe0-44b3-8027-bfa3ec6bfbd4

Mukherjee, Subhadip, Mukherjee, Soumyatanu, Mishra, Tapas, Broll, Udo and Parhi, Mamata (2020) Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach. European Journal of Finance, 27 (8), 752-773. (doi:10.1080/1351847X.2020.1842785).

Record type: Article

Abstract

This paper studies characteristics of optimal investment decisions of risk-averse firms who engage in exports under two types of risks: endogenous and background risks. While endogenous risk arises from the fluctuations in spot exchange rate and affects directly the profit of an exporting firm, background risk arises from uncertain changes in firm- and industry- specific domestic and foreign policies. We propose a mean-variance decision-theoretic model to trace out impact of perturbations in the distributions of these uncertainties on the optimal investment strategy. A testable empirical model is derived and applied to a panel of 840 exporting Indian manufacturing firms for the period 1995-2015. Our results suggest that Indian manufacturing exporters depict decreasing absolute risk aversion and that firms’ risk preferences are prone to variance vulnerability.

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Accepted-full-manuscript-EJF-2020 - Accepted Manuscript
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More information

Accepted/In Press date: 6 October 2020
e-pub ahead of print date: 11 November 2020
Published date: 11 November 2020
Additional Information: Publisher Copyright: © 2020 Informa UK Limited, trading as Taylor & Francis Group. Copyright: Copyright 2020 Elsevier B.V., All rights reserved.
Keywords: Background risk, Investment decision, Mark-up estimation, Risk aversion elasticities, Spot exchange rate risk

Identifiers

Local EPrints ID: 444459
URI: http://eprints.soton.ac.uk/id/eprint/444459
ISSN: 1351-847X
PURE UUID: 4f0df6f2-2058-4544-9cc3-9a37b608d28a
ORCID for Soumyatanu Mukherjee: ORCID iD orcid.org/0000-0003-0674-1064
ORCID for Tapas Mishra: ORCID iD orcid.org/0000-0002-6902-2326

Catalogue record

Date deposited: 20 Oct 2020 16:31
Last modified: 28 Apr 2022 05:58

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Contributors

Author: Subhadip Mukherjee
Author: Tapas Mishra ORCID iD
Author: Udo Broll
Author: Mamata Parhi

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