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Asymmetric exchange-rate exposure in BRIC countries

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  • Dranev Yury

    ()
    (National Research University Higher School of Economics)

  • Maxim Babushkin

    ()
    (Ernst&Young)

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    Abstract

    This work contributes to the literature on exchange-rate exposure in emerging markets. We studied datasets of exchange-listed companies from four BRIC countries and discovered that exchange rate movements in the US dollar and euro affected more than 10% of these firms between 2003 and 2013. The most interesting finding of this research is that stock returns behaved differently with increasing and decreasing currency rates. For capturing the asymmetric relationship of stock and exchange rate movements, we applied a nonlinear dynamic model, which significantly improved our results compared to the empirical findings of simple versions of the Adler Dumas (1984) and Jorion (1990) models. We studied determinants of exposure to positive and negative currency movements separately. Although significant determinants in both cases were mostly similar, their weights were different. For example, the ratio of export sales was asymmetrically correlated to exchange rate exposures for all countries except Russia. For a better understanding of the sources of asymmetry in exchange rate exposure, we separately studied the positive and negative coefficients of currency exposure from the non-asymmetric model. This was never done before and natural in a way that determinants should affect positive and negative currency exposures differently. We found evidence of the contrasting impact of export sales and foreign debt in both cases.

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    File URL: http://www.hse.ru/data/2014/02/04/1329381211/27FE2014.pdf
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    Bibliographic Info

    Paper provided by National Research University Higher School of Economics in its series HSE Working papers with number WP BRP 27/FE/2014.

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    Length: 16 pages
    Date of creation: 2014
    Date of revision:
    Publication status: Published in WP BRP Series: Financial Economics / FE, February 2014, pages - 16
    Handle: RePEc:hig:wpaper:27/fe/2014

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    Keywords: exchange rate exposure; currency markets; stock returns; asymmetric model; emerging markets.;

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