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A change in exchange rate through its effect on the costs of inputs, outputs, and substitute goods affects the competitive position of domestic companies with no direct international involvement relative to foreign corporations. The financial literature focuses on the effect of oil price changes on stock returns, economic growth and some macroeconomic variables, however the literature is still not inclusive about the effect of oil price changes on financial variables, more specifically the value of the firms. Furthermore, academics, policymakers, and practitioners have frequently discussed the link between oil prices and exchange rates in recent years- particularly the idea that an appreciation of the US dollar triggers a dip in oil prices. However, the empirical evidence on the impact of exchange rates and oil price changes on firm value is not conclusive which is surprising in view of the considerable fluctuations in both exchange rate and oil prices over the last 40 years. The review of relevant literature reveals that previous studies neglect the potential role of financial crises in affecting the relationship in question. In addition, some economists suggest that exchange rate exposures are not constant over time, instead they are time varying. Many previous studies separate the whole sample period into some sub-periods. Countries form different exchange rate treaties to well manage the adverse effects of exchange rate fluctuations. In addition, the literature to date indicates that exchange rate exposure varies across industries. Pick up a sample of companies from a specific country (at least 30 companies). The sample should include two sub-samples: the first is financial and the second is nonfinancial. As financial companies have different characteristics please analyse them separately. The required data should include: Daily, weekly or monthly share prices, national stock market index (e.g. FTSE100, DOW30, NASDAQ, S&P500, DAX30, CAC40, EGX100 etc.) crude oil price index (WTI) and relevant exchange rate rates (Trade Weighted (TW) if available; if not bilateral exchange rates e.g. AUS$/US$ will be used). The data should cover the period between 15th December 1999 and 15th Dec. 2017. The data for exchange rates, national market indexes and stock prices can be obtained from DataStream, Bloomberg and Yahoo Finance. In addition, crude oil prices (WTI) can be downloaded from: https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm or https://fred.stlouisfed.org/series/DCOILWTICO The following time-series regression model can be used: Rit = αi + β1iERt + β2iRMt + β3iOILt + eit t= 1,……..,T where 2 Rit is the stock return for the firm i, over time period t, αi is the intercept term for firm i, β1i, β2i and β3i are the foreign exchange rate exposure coefficient, market exposure coefficient, and oil price changes coefficient respectively. ERt is the percentage change in exchange rates over time period t, RMt is the rate of return on the market index, OILt is the oil price changes and eit is the random error term for firm i in period t. The sign of the coefficients indicates the direction of individual firm exposure. Significant positive (negative) sings of β mean that firm values increase when exchange rates/oil prices/market returns increase (decrease). You are required to a) Estimate the exposure of the sampled companies to the exchange rate risk market risk and oil price as follows i. Pre-2008 CRISIS sub-period (15th January 2000 to 15th December 2006, ii. During-2008 CRISIS sub-period (15th January 2007 to 15th December 2009) iii. Post-2008 CRISIS sub-period (15th January 2010 to 15th December 2017). iv. Discuss your results and comment on the exposure coefficients in the above different sub periods. You need to explain what is the exchange rate, market and oil price exposure of the sampled companies before, during and after the 2008 crisis? (80 marks) b) Compare and contrast your results with previous studies in the area explaining similarities and differences. (20 marks) (Word limit: 2500 words or 10 pages) You should show all workings. Summarize the results in tables. Please do not include the raw data in the text
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