Measuring the effect of exchange rate movements on firms profitability: The case of Turkey

Most of the firms suffer from the risk of exchange rate. However this risk can be eliminated or reduced by using proper exchange rate forecasting methods. Firms' production and export are the most vulnerable items that affect by exchange rate risk. At the same time production and export have substantial effects on firms' profitability and rate of return of the common stocks. Empirical investigations of the effects of unexpected exchange rate movements on firms profitability and asset returns are mostly based on the Capital Asset Pricing Model (CAPM). In this study instantaneous and lagged effects of unexpected exchange rate changes are measured by analyzing production and export within CAPM type model. The data is derived from detailed balance sheets, income statements and asset prices of common stocks that trade in Istanbul Stock Exchange Market (İSE ) between 1994:01 and 2001:02 (quarterly). As a consequence, unexpected exchange rate changes affect production instantaneously and negatively. However export is being affected positively with some lag. These results can be interpreted as unexpected exchange rate changes affect firms profitability negatively. Key Words:Exchange rate risk, measuring exchange rate risk and exposure, capital asset pricing model, relationship between profitability and exchange rate risk, autoregressive exchange rate expectation model.