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Exchange rate exposure of stock returns at firm level

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Author Info
Gamini Premaratne (NUS)
Prabhath Jayasinghe (NUS)

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Abstract

The use of conventional augmented CAPM specification in estimating the exchange rate exposure may result in less reliable estimates for, at least, two reasons. First, it does not take into account a few important stylized facts associated with financial time series. Second, one cannot estimate the total impact of the exchange rate changes on stock returns as a single coefficient with it and for this reason it does not help us analyze the reinforcing or offsetting interactions between direct and indirect exchange rate exposure effects. In this paper, we suggest an orthogonalized GJR-GARCH-t version of augmented CAPM that simultaneously addresses the above issues. Our findings have important implications for hedging and investment decision making.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 0503004.

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Length: 40 pages
Date of creation: 11 Mar 2005
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Handle: RePEc:wpa:wuwpif:0503004

Note: Type of Document - pdf; pages: 40
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Web page: http://129.3.20.41

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Related research
Keywords: Exchange rate exposure; GARCH; t distribution; Asymmetric volatility;

Find related papers by JEL classification:
F3 - International Economics - - International Finance
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
F31 - International Economics - - International Finance - - - Foreign Exchange
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Angelos Kanas, 2000. "Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 27(3&4), pages 447-467. [Downloadable!] (restricted)
    Other versions:
  2. Peter Verhoeven & Michael McAleer, 2003. "Fat Tails and Asymmetry in Financial Volatility Models," CIRJE F-Series CIRJE-F-211, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  3. BAUWENS, Luc & LAURENT, SŽbastien & ROMBOUTS, Jeroen, 2003. "Multivariate GARCH models: a survey," CORE Discussion Papers 2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
  4. Kanas, Angelos, 1997. "Is economic exposure asymmetric between long-run depreciations and appreciations? Testing using cointegration analysis," Journal of Multinational Financial Management, Elsevier, vol. 7(1), pages 27-42, April. [Downloadable!] (restricted)
  5. Horst Entorf & Gösta Jamin, 2003. "German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs," Darmstadt Discussion Papers in Economics 126, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
    Other versions:
  6. Vincent BODART & Paul REDING, 2001. "Do Foreign Exchange Markets Matter Dor Industry Stock Returns ? An empirical investigation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  7. Di Iorio, Amalia & Faff, Robert, 2000. "An analysis of asymmetry in foreign currency exposure of the Australian equities market," Journal of Multinational Financial Management, Elsevier, vol. 10(2), pages 133-159, June. [Downloadable!] (restricted)
  8. Gordon M. Bodnar & M.H. Franco Wong, 2003. "Estimating Exchange Rate Exposures: Issues in Model Structure," Financial Management, Financial Management Association, vol. 32(1), Spring.
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  10. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August. [Downloadable!] (restricted)
  11. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "Exchange Rate Exposure," NBER Working Papers 8453, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Koutmos, Gregory & Martin, Anna D., 2003. "Asymmetric exchange rate exposure: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 365-383, June. [Downloadable!] (restricted)
  13. Priestley, Richard & Odegaard, Bernt Arne, 2007. "Linear and nonlinear exchange rate exposure," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 1016-1037, October. [Downloadable!] (restricted)
  14. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 363-376, September. [Downloadable!]
  15. Griffin, John M & Stulz, Rene M, 2001. "International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(1), pages 215-41.
    Other versions:
  16. Choi, Jongmoo Jay & Hiraki, Takato & Takezawa, Nobuya, 1998. "Is Foreign Exchange Risk Priced in the Japanese Stock Market?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 361-382, September. [Downloadable!]
  17. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February. [Downloadable!] (restricted)
  18. Jia He & Lilian K. Ng, 1998. "The Foreign Exchange Exposure of Japanese Multinational Corporations," Journal of Finance, American Finance Association, vol. 53(2), pages 733-753, 04. [Downloadable!] (restricted)
  19. Khoo, Andrew, 1994. "Estimation of foreign exchange exposure: an application to mining companies in Australia," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 342-363, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Entorf & Jamin, 2005. "German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs," International Finance 0508005, EconWPA. [Downloadable!]
    Other versions:
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