Exchange Rate Exposure of Sectoral Returns and Volatilities: Evidence from Japanese Industrial Sectors
AbstractMost 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 InfoPaper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0710.
Length: 35 pages
Date of creation: Jun 2007
Date of revision:
exchange rate exposure; asymmetric volatility spillovers; GARCH-type models; conditional correlation;
Other versions of this item:
- Jayasinghe, Prabhath & Tsui, Albert K., 2008. "Exchange rate exposure of sectoral returns and volatilities: Evidence from Japanese industrial sectors," Japan and the World Economy, Elsevier, vol. 20(4), pages 639-660, December.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-13 (All new papers)
- NEP-RMG-2007-07-13 (Risk Management)
- NEP-SEA-2007-07-13 (South East Asia)
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