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 (SPt) and the percentage change in the peso's value relative to the dollar (PESOt). SPt 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 PESOt variable would be ____ in the first subperiod and ____ in the second subperiod.

Question

Quizplus · Accepted Answer

The regression coefficient in the PESOt variable would likely be negative in both subperiods because as the value of the peso decreases relative to the dollar (i.e., the peso depreciates), it becomes cheaper for the firm to import chairs from Mexico, potentially increasing profits and thus the firm's stock price. An increase in importing volume would likely amplify this effect, not reverse it.

Assume That Your Firm Is an Importer of Mexican Chairs