Spot Exchange Rate Volatility, Uncertain Policies and Export Investment Decision of Firms: A Mean-Variance Decision Approach

Subhadip Mukherjee, Soumyatanu Mukherjee, Tapas Mishra, Udo Broll, Mamata Parhi

Research output: Contribution to journalArticlepeer-review


This paper studies characteristics of optimal investment decisions of risk-averse firms who engage in exports under two types of risks: endogenous and background risks. While endogenous risk arises from the fluctuations in spot exchange rate and affects directly the profit of an exporting firm, background risk arises from uncertain changes in firm- and industry- specific domestic and foreign policies. We propose a meanvariance decision-theoretic model to trace out impact of perturbations in the distributions of these uncertainties on the optimal investment strategy. A testable empirical model is derived and applied to a panel of 840 exporting Indian manufacturing firms for the period 1995-2015. Our results suggest that Indian manufacturing exporters depict decreasing absolute risk aversion and that firms’ risk preferences are prone to variance vulnerability.
Original languageEnglish
JournalEuropean Journal of Finance
Early online date11 Nov 2020
Publication statusE-pub ahead of print - 11 Nov 2020

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