Exchange Rate Uncertainty and Firm Profitability

Posted: 1 Aug 2001

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College - Department of Economics

Mustafa O. Caglayan

University of Sheffield

John T. Barkoulas

University of Tennessee, Knoxville - College of Business Administration - Department of Economics

Abstract

This paper investigates the effects of permanent and transitory components of the exchange rate on firms' profitability under imperfect information. Utilizing a signal extraction framework, we show that the variances of these components of the exchange rate process will have indeterminate effects on the firm's growth rate of profits, but will have predictable effects on its volatility. An increase in the variance of the permanent (transitory) component in the exchange rate process leads to greater (lesser) variability in the growth rate of the firm's profits, thus establishing that the source of exchange rate volatility matters in analyzing its effects. Implications of our theoretical findings for the empirical modeling of the underlying relationships are discussed.

Suggested Citation

Baum, Christopher (Kit) F. and Caglayan, Mustafa O. and Barkoulas, John T., Exchange Rate Uncertainty and Firm Profitability. Available at SSRN: https://ssrn.com/abstract=271080

Christopher (Kit) F. Baum (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Mustafa O. Caglayan

University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

John T. Barkoulas

University of Tennessee, Knoxville - College of Business Administration - Department of Economics

508 Stokely Management Center
Knoxville, TN 37996-0550
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,128
PlumX Metrics