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TIME-VARYING EXCHANGE RATE EXPOSURE COEFFICIENTS (EXPOSURE BETAS): EVIDENCE FROM COUNTRY LEVEL STOCK RETURNS

Abstract

This paper uses time-varying second moments to inves-tigate exchange rate exposure betas. Using a BEKK-GARCH(1,2,1)-M model, time-varying exchange rate exposure betas are obtained with explicit focus on the nonorthogonality between exchange rate changes and market returns. We look into certain aspects of the sto-chastic structure underlying the exposure betas. An important finding of the paper is that, although exchange rate exposure betas are likely to vary over time, they follow  mean-reverting long-memory processes. The presence of mean-reverting exchange rate exposure coefficients has important implications for investment and hedging strategies.

Keywords: Time-varying exchange rate exposure; Multivariate GARCH-M models; International CAPM; Fractionally integrated processes

For full paper: fmscresearch@sjp.ac.lk


Author Biography

P. Jayasinghe

Department of Business Economics,
Faculty of Management & Finance,
University of Colombo

A. K. Tsui

Department of Economics,
National University of Singapore