The effect of export portfolio on export earnings and risks
Abstract
Purpose
The purpose of this paper is to assess a country’s export returns and return volatility and to demonstrate that such an approach is a relevant method to predict a country’s export earnings and risks. Also to suggest important policy implications for Korea’s trade in terms of diversifying its export structure of products and destinations.
Design/methodology/approach
The modern portfolio theory by Markowitz (1959) is applied to predict a country’s export earnings and risks. The import amount of a product, which includes aspects of both price and volume, is used as a measure of returns and return volatility and, as a result, the correlation matrix between 19 product groups covering almost all the export goods is calculated. The empirical analysis to show a strong causal relationship between expected returns and the return volatility of a country’s export portfolio and its real export earnings and risks is also made.
Findings
This study demonstrates that the portfolio approach can be a useful method to predict export returns. Also suggests that Korea needs to change its portfolio of both export products and destinations in order to maintain more stable growth of its trade and reduce its vulnerability to an external shock.
Research limitations/implications
The empirical tests have many limitations because they are based on simple cross-sectional models.
Practical implications
The study shows that the modern portfolio approach to export by using prices and volume as a measure of variation in returns can predict how vulnerable a country’s export earnings is to economic shocks, and thus, provide a useful policy implication in the design of export structure and resource allocation.
Originality/value
This study provides a new idea to predict a country’s export earnings and risks by applying the export portfolio.
Keywords
Acknowledgements
JEL Classification — F14, F17, F47
© Korea Trade and Research Association
Citation
Kim, C.-S. and Je, H.-J. (2016), "The effect of export portfolio on export earnings and risks", Journal of Korea Trade, Vol. 20 No. 2, pp. 118-133. https://doi.org/10.1108/JKT-04-2016-0006
Publisher
:Emerald Group Publishing Limited