Exchange rate volatility and exports: estimation of firms’ risk preference using firm-level data from India (with Udo Broll (TU Dresden) and Rudra Sensarma (IIM))
AbstractIn this companion paper to Broll and Mukherjee (2017), we empirically analyse how exchange rate volatilities affect firms’ optimal production and exporting decisions. A firm’s elasticity of risk aversion between risk and return determines the direction of the impact of exchange rate risk on exports. Based on a flexible utility function that incorporates all possible risk preferences, a unique structurally estimable equation is used to estimate the risk aversion elasticities for a panel of Indian service sector (non-financial) firms over 2004-2015, using the quantile regression method. Quantile regression allows to estimate how characteristics of exports varies with the level of elasticities across the conditional exchange rate distribution.
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