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Exchange rate exposure of sectoral returns and volatilities: Evidence from Japanese industrial sectors

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  • Jayasinghe, Prabhath
  • Tsui, Albert K.

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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File URL: http://www.sciencedirect.com/science/article/pii/S0922-1425(07)00036-9
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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 20 (2008)
Issue (Month): 4 (December)
Pages: 639-660

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Handle: RePEc:eee:japwor:v:20:y:2008:i:4:p:639-660
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

Keywords: Exchange rate exposure Asymmetric volatility spillovers GARCH-type models Conditional correlation;

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Find related papers by JEL classification:
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Cited by:

  1. Serkan Yilmaz Kandir & Ahmet Erismis, 2010. "Investigating Exchange Rate Exposure of Bank Shares: Empirical Evidence From ISE," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 12(46), pages 49-83.
  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.
  3. Joseph, Nathan Lael & Lambertides, Neophytos & Savva, Christos S., 2015. "Short-horizon excess returns and exchange rate and interest rate effects," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 54-76.
  4. Juan Benjamín Duarte Duarte & Juan Manuel Mascare?nas Pérez-Iñigo, 2014. "Comprobación de la eficiencia débil en los principales mercados financieros latinoamericanos," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI, November.
  5. Thorbecke, Willem, 2014. "The contribution of the yen appreciation since 2007 to the Japanese economic debacle," Journal of the Japanese and International Economies, Elsevier, vol. 31(C), pages 1-15.
  6. Lestano, Lestano, 2015. "Asymmetric Exchange Rate Exposure in Indonesian Industry Sectors," MPRA Paper 64357, University Library of Munich, Germany.
  7. Takatoshi Ito & Satoshi Koibuchi & Kiyotaka Sato & Junko Shimizu, 2015. "Exchange Rate Exposure and Risk Management: The case of Japanese Exporting Firms," NBER Working Papers 21040, National Bureau of Economic Research, Inc.
  8. Jiranyakul, Komain, 2016. "Are Thai Equity Index Returns Sensitive to Interest and Exchange Rate Risks?," MPRA Paper 71602, University Library of Munich, Germany.

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