Currency Crises and Exchange Rate Exposure

Abstract

While undergoing currency crises, countries under fixed exchange rate regime elect to adopt flexible exchange rate regime. It is generally expected that if a country launches floating exchange rate regime, the exchange rate volatility increases. Therefore, the increase in exchange rate volatility may increase exposures to currency risks at the firm level. Previous research, however, such as Bian, Park and Cho (2006) shows that right after the currency crisis of 1997~1998, currency risk exposure for Korean firms actually decreased after the government adopted flexible exchange rate regime. In this study, we intend to study the effects of changes in exchange rate regimes on foreign currency exposures at the firm level around the currency crises in the 1990s using worldwide data. We use 2116 firms in 23 countries finds evidence that exchange rate exposure of majority of firms decreases after the financial crises. In a sub-sample analysis in which sub-samples are created depending on whether the home country changed exchange rate regime from fixed to flexible, we find that the reduction of exposure was greater for firms in countries that changed the regimes than those in countries that did not.