Siddharth Bajpai and Samarendu Mohanty. Texas Tech University, MS 42132, Dept of Agricultural and Applied Economics, Texas Tech University, Lubbock, TX 79409
The domestic and international trade policies have resulted in major changes in the structure of the U.S. cotton and textile industry and necessitate an emphasis on the new business environment and the risks associated with it. With exchange rate volatility being one of the most important risks in an international trading environment, a structural time series approach utilizing the state space model is used to analyze the impact of exchange rate volatility on the bilateral U.S. cotton textile and apparel imports. An EGARCH (Exponential Generalized Autoregressive Conditional Heteroskedasticity) model with normal and non-normal errors is used to estimate the volatility of exchange rate. Two other measures of volatility including a six month moving standard deviation and a standard deviation of the first difference of the log of exchange rate are used to check for the robustness of the results. Monthly data from January 1995 to November 2006 for Mexico, Korea, Japan, Costa Rica, Honduras, Nicaragua, Guatemala, Dominican Republic and ElSalvador is utilized for the analysis. Preliminary results indicate a negative relationship between exchange rate volatility and imports for most countries.
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