Asymmetric foreign exchange exposure: A cross country sector analysis in the Asia Pacific
Faculty of Business and Public Management
School of Accounting, Finance and Business Economics
Standard finance theory argues that changes in exchange rate carry transaction and economic exposures on a firm’s expected future cash flows, which in turn affect the firm value. An extension of the theory further suggests that the foreign exchange effect may also be asymmetric. Al-though numerous empirical studies have attempted to de-tect the sensitivity of stock returns to exchange rate changes, conclusive evidence is far and between. The overall mixed findings in the literature could in part due to two specification problems, namely omission of rele-vant factors proposed by several theories and the presence of conditional heteroskedasticity in share price and ex-change rate changes. The aim of this paper is to investi-gate the foreign exchange effect on returns by explicitly incorporating these two problems using the generalised autoregressive conditional heteroscedasticity model. With the dramatic devaluation of several Asian currencies fol-lowing the 1997 financial crisis, analysis of foreign ex-change exposure will be of practical important to inves-tors and finance managers interested in the area. This study focuses on analysis of US dollar exposure on sector returns in the Asia Pacific, as firms in this region tend to be more export oriented and often with the US as their largest export market.