Recherche FFJ Research Statement Willem Thorbecke

Willem Thorbecke

The Exposure of European and East Asian Firms to the COVID-19 Pandemic and to Exchange Rates: Evidence from the Stock Market


Different economies have managed the COVID-19 crisis differently. For instance Taiwan learned of the virus in December 2019, monitored flights from Wuhan, and provided masks to everyone. It experienced only 0.4 deaths per million people. The French government initially said masks were unnecessary and later implemented two strict lockdowns. It suffered 1,344 deaths per million people. This research investigates how the coronavirus shock has affected economies in Europe and East Asia and how these effects are related to countries’ successes or failures at controlling the virus.

The economies investigated include France, Germany, Italy, Japan, South Korea, and Taiwan. The first question investigated is how these countries’ macroeconomic environments have evolved. The second is how individual sectors across countries have been impacted.

Stock returns are used to investigate these questions. These should be useful because finance theory indicates that stock returns equal the expected present value of future cash flows. There should thus be a relationship between how stock returns respond and how firms or sectors are affected. As Black (1987, p. 113) said, “The sector-by-sector behavior of stocks is useful in predicting sector-by-sector changes in output, profits, or investment. When stocks in a given sector go up, more often than not that sector will show a rise in sales, earnings, and outlays for plant and equipment.” Stock returns are also useful because comparable high frequency data are available across sectors in all of the countries studied.

The crisis caused stock returns around the world to fall beginning around 19 February 2020. The changes in stock prices after 18 February 2020 are thus observed. Returns are also decomposed into the portions driven by idiosyncratic factors and by macroeconomic factors. Macroeconomic factors include the return on the country’s and the world’s aggregate stock markets, exchange rates, and crude oil prices. Actual out-of-sample values of these macroeconomic variables are used to forecast returns during the coronavirus period. These forecasted returns represent the changes in returns driven by the macroeconomic environment. The difference between actual returns over the crisis period and forecasted returns then measures the portion of returns driven by idiosyncratic factors.

The changes in returns driven by macroeconomic factors and idiosyncratic factors across sectors and countries are observed. This approach sheds light on several questions. How have the same sectors fared in countries that have succeeded and failed in fighting the crisis? Are these differences due to macroeconomic differences between the countries or to sector-specific responses? Are there certain sectors that have succeeded across countries during the crisis? Are these sectors promising and should resources be reallocated to these sectors? Is there a winner-take-all phenomenon in certain sectors? For instance, do French luxury brands perform better than luxury brands in other countries during the crisis? Are certain sectors dependent of China and its rapid recovery from the COVID-19 crisis? This could be observed by including China’s stock returns as an explanatory variable in regressions explaining sectoral returns. What sectors across countries have not recovered even when the macroeconomic environment in a country has improved?

Rogoff (2020) and Ilzetzki, Reinhart, and Rogoff (2020) noted that exchange rates have remained “eerily” stable during the COVID-19 pandemic. They predicted that volatility will reemerge and that the U.S. dollar will depreciate towards its mean. The Eurozone and several East Asian countries run large current account surpluses year after year. These surpluses could cause the euro and Asian currencies to appreciate. This research also investigates how exchange rates affect economies in Europe and East Asia.

Previous research indicates that appreciations impact firms in these countries by decreasing the volume of exports, increasing markups, decreasing the costs of imported inputs, and in other ways (see e.g., Baak, 2014, Baek, 2013, Bénassy-Quéré et al., 2014, Berman, Martin, and Mayer, 2012, Héricourt, Martin, and Orefice, 2014). Rather than investigating each of these channels separately and trying to add them together, this paper investigates how exchange rates affect stock prices. This provides evidence at the firm or sector level of the overall effect of exchange rates on profitability.

This allows us to address other questions. Are German firms less exposed to exchange rate appreciations than French firms, as one might expect if German firms have greater non-price competitiveness (see Conseil National de Productivité, 2019)? Are sectors with more pricing power (e.g., French luxury firms) less exposed to exchange rates than commoditized sectors (e.g., steel)? Is there cooperation or competition between the same sector across countries. For instance, if a depreciation of the Japanese yen reduces returns for Korean automakers, this indicates that the two sectors are competing. If a depreciation of the yen increases returns for Korean electronic parts and components firms, this indicates that the Korean firms use Japanese inputs and benefit from cheaper imports. How are banks that possess foreign currency debts affected by exchange rate changes?

This research can generate information for policymakers. For instance, what sectors are able to succeed and prosper during the pandemic? What sectors are stagnating? How can promising sectors be sustained? Should resources be redirected from zombie firms and sectors to the more promising sectors? What sectors are exposed to both the risks of the pandemic resurging and of exchange rates appreciating? What sectors are resilient, and what factors allow these sectors to weather shocks? How are banks that play an important role in the economies investigated affected by the pandemic and by exchange rates? How have green industries fared during the coronavirus period? What lessons for managing the crisis can be gleaned from countries whose firms and economies have prospered during the crisis? How can policymakers continue to nurture an economic recovery if the pandemic continues or if the pandemic is vanquished?


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Ilzetzki, E., Reinhart, C., and Rogoff, K. 2020. Will the Secular Decline in Exchange Rate and Inflation Volatility Survive COVID-19? NBER Working Paper No. 28108. Cambridge, Mass.: National Bureau of Economic Research.

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