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International trade and firms' attitude towards risk |
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| Affiliation: | 1. Université Côte d''Azur, SKEMA, France;2. Université Côte d''Azur, CNRS, GREDEG, France;3. Université Côte d''Azur, CNRS, GREDEG, SKEMA, OFCE-DRIC, France;1. De Nederlandsche Bank, Amsterdam, currently seconded to the European Commission, The Netherlands;2. Nyenrode Business Universiteit, Breukelen, The Netherlands;3. Erasmus School of Economics, Rotterdam, The Netherlands;1. Research Institute of Industrial Economics;2. Department of Economics and Finance, University of South Alabama;3. Department of Economics and Finance, University of New Orleans |
| Abstract: | This paper examines the optimal production and trade decisions of the domestic firms facing uncertainties owing to the exchange rate volatility under mean-variance preferences. The impact of uncertain exchange rate fluctuations on trade is evaluated in a partial equilibrium framework, using the concept of risk-aversion elasticities. These elasticities measure how sensitive the firms are towards substituting between return and risk at the margin, with respect to changes in the distribution of the spot exchange rate. This simplest possible analytical framework is useful for explicit empirical estimation of risk-aversion elasticities in the literature of international economics. |
| Keywords: | Two–moment decision model Export Imported intermediate input Exchange rate risk Risk–aversion elasticity |
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