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Exchange Rate Risk and the Impact of Regret on Trade

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  • Udo Broll
  • Peter Welzel
  • Kit Wong

Abstract

This paper examines the behavior of the regret-averse firm under exchange rate uncertainty. Regret-averse preferences are characterized by a modified utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the conventional results that the firm optimally produces less, sells more domestically, and export less abroad under uncertainty than under certainty holds if the firm is not too regret-averse. Using a binary model wherein the random spot exchange rate can take on either a low value or a high value with positive probability, we show that the conventional results may not hold, particularly when the firm is sufficiently regret-averse and the low spot exchange rate is very likely to prevail. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Udo Broll & Peter Welzel & Kit Wong, 2015. "Exchange Rate Risk and the Impact of Regret on Trade," Open Economies Review, Springer, vol. 26(1), pages 109-119, February.
    • Handle: RePEc:kap:openec:v:26:y:2015:i:1:p:109-119
    DOI: 10.1007/s11079-014-9321-0
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    Citations

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    Cited by:

    1. Wong, Kit Pong, 2014. "Fixed versus variable rate loans under regret aversion," Economic Modelling, Elsevier, vol. 42(C), pages 140-145.
    2. Martín Egozcue & Xu Guo & Wing-Keung Wong, 2015. "Optimal output for the regret-averse competitive firm under price uncertainty," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(2), pages 279-295, December.
    3. Udo Broll & Peter Welzel & Kit Pong Wong, 2016. "Regret theory and the competitive firm revisited," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 481-487, December.
    4. Entrop, Oliver & Fuchs, Fabian U., 2020. "Foreign exchange rate exposure of companies under dynamic regret," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-40-20, University of Passau, Faculty of Business and Economics.
    5. Yutaka Kurihara, 2016. "Effectiveness of the Zero Interest Rate Policy for Financial Markets in Japan: Principal Components Analysis," Applied Economics and Finance, Redfame publishing, vol. 3(3), pages 103-111, August.
    6. Yutaka Kurihara, 2015. "Are Japanese Stock Prices Important Deterministic Elements of Exchange Rate Returns?," Bulletin of Applied Economics, Risk Market Journals, vol. 2(2), pages 1-9.
    7. Broll, Udo & Welzel, Peter & Wong, Kit Pong, 2017. "The firm under regret aversion," CEPIE Working Papers 03/17, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    8. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll & Mamata Parhi, 2021. "Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 752-773, May.
    9. Guo, Xu & Wong, Wing-Keung & Xu, Qunfang & Zhu, Xuehu, 2015. "Production and hedging decisions under regret aversion," Economic Modelling, Elsevier, vol. 51(C), pages 153-158.
    10. Broll, Udo & Welzel, Peter & Wong, Kit Pong, 2019. "Hedging and the regret theory of the competitive firm," CEPIE Working Papers 05/19, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    11. repec:rmk:rmkbae:v:2:y:2014:i:2:p:1-9 is not listed on IDEAS

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    More about this item

    Keywords

    Exchange rate risk; Exporting; Regret theory; D81; F23; F31;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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