Insights Into Central And Eastern European Countries Competitiveness: On The Exposure Of Capital Markets To Exchange Rate Risk

Unexpected fluctuations in exchange rates represent a matter of concern for all businesses nowadays as the volatility in exchange rates impacts businesses’ cash flows, revenues and expenses, and eventually is reflected in the company’s risk-return profile. Companies’ exposures to exchange rate risk have considerably increased in the past decades, given the boost in international operations and the continuous diversification of businesses’ activities at the global level. Despite the attention that businesses display to nominal exchange rates changes, it is the real exchange rate that should be of more concern to corporate managers, since they induce changes at the level of the competitiveness of the business. Our paper comparatively analyzes the exposure to changes in the nominal and real exchanges rates of the local currencies that companies from a number of four Central and Eastern European countries (Romania, Hungary, Czech Republic and Poland) and investigates the nature of the relationship between stock market performance and exchange rates in the four countries under consideration. We find limited evidence for contemporaneous and asymmetric exposure to nominal and real exchange rate risk in all four countries, but consistent evidence for three to four months lagged exposure.