Exposure to Exchange Rate Risk and Competitiveness: An Application to South-Eastern Europe

Our chapter investigates the economic exposure to currency risk of stock markets from nine countries in South-Eastern Europe using bilateral exchange rates of the domestic currencies against their main trading partners’ currencies between 1999 and 2015. The relevance and magnitude of exposures are investigated through changes in exchange rates in linear and non-linear specifications. Our results indicate that these economies show contemporaneous exposure to currency risk, but they are different in size and sign from one country to another and from one currency to another, a result that can be explained by the dissimilar economic structures in the region. There is smaller evidence for asymmetric exposures in linear specifications, which might indicate a general inability of companies in the region to use real or financial options in order to benefit from the positive effects of changes in exchange rates or to hedge the undesired expected exposures. The evidence for non-linear exposures is strong for these economies and generally shows that companies’ value is negatively influenced by higher volatility in exchange rates and more frequent appreciations of foreign currencies. Overall, our findings suggest that countries from South-Eastern Europe face competitiveness challenges regarding their main trading partners, but also that companies from the region are less capable to use real and financial options to mitigate their exposures to currency risk and this is reflected in their overall market performance.