Assume that your firm is an importer of Mexican chairs denominated in pesos. Your competition is mainly U.S. producers of chairs. You wish to assess the relationship between the percentage change in the firm's stock price (SP_t) and the percentage change in the peso's value relative to the dollar (PESO_t). SP_t is the dependent variable. You apply the regression model to an earlier subperiod and a more recent subperiod. In the recent subperiod, you increased your importing volume. You should expect that the regression coefficient in the PESO_t variable would be ____ in the first subperiod and ____ in the second subperiod.

Question

Quizplus · Accepted Answer

The regression coefficient in the PESO_t variable would likely be negative in both subperiods because as the value of the peso increases relative to the dollar, the cost of importing chairs from Mexico in dollar terms increases, potentially reducing the firm's profitability and thus negatively impacting its stock price. This relationship is expected to hold regardless of the volume of imports, although the magnitude of the effect might change.

Assume That Your Firm Is an Importer of Mexican Chairs