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Exchange Rate Exposure of Sectoral Returns and Volatilities: Evidence from Japanese Industrial Sectors

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  • Prabhath Jayasinghe

    (Department of Economics, National University of Singapore)

  • Albert K. Tsui

    ()
    (Department of Economics, National University of Singapore)

Abstract

Most studies of exchange rate exposure of stock returns do not address three relevant aspects simultaneously. They are, namely: sensitivity of stock returns to exchange rate changes; sensitivity of volatility of stock returns to volatility of changes in foreign exchange market; and the correlation between volatilities of stock returns and exchange rate changes. In this paper, we employ a bivariate GJR-GARCH model to examine all such aspects of exchange rate exposure of sectoral indexes in Japanese industries. Based on a sample data of fourteen sectors, we find significant evidence of exposed returns and its asymmetric conditional volatility of exchange rate exposure. In addition, returns in many sectors are correlated with those of exchange rate changes. We also find support for the “averaged-out exposure and asymmetries” argument. Our findings have direct implications for practitioners in formulating investment decisions and currency hedging strategies.

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Bibliographic Info

Paper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0710.

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Length: 35 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:sca:scaewp:0710

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Web page: http://www.fas.nus.edu.sg/ecs/scape/index.html
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Keywords: exchange rate exposure; asymmetric volatility spillovers; GARCH-type models; conditional correlation;

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References

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  1. Sheng-Yung Yang & Shuh-Chyi Doong, 2004. "Price and Volatility Spillovers between Stock Prices and Exchange Rates: Empirical Evidence from the G-7 Countries," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 3(2), pages 139-153, August.
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Cited by:
  1. Willem Thorbecke, 2012. "The Contribution of the Yen Appreciation since 2007 to the Japanese Economic Debacle," Working Papers 2012-31, CEPII research center.
  2. Tian Yong Fu & Mark J. Holmes & Daniel F.S. Choi, 2011. "Volatility transmission and asymmetric linkages between the stock and foreign exchange markets: A sectoral analysis," Studies in Economics and Finance, Emerald Group Publishing, vol. 28(1), pages 36-50, March.

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