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MULTI-ELEMENTS OF EXCHANGE RATE EXPOSURE: EVIDENCE FROM JAPANESE SECTORAL RETURNS

Abstract

This paper examines the adequacy of the exposure coefficient/beta in measuring entire impact of exchange rate changes on firms’ future operating cash flows. To this end, we investigate the presence of four elements of exchange rate exposure: (a) sensitivity of stock returns to exchange rate changes; (b) sensitivity of stock returns to the volatility of exchange rate changes; (c) sensitivity of conditional variance of returns to exchange rate volatility; and (d) dynamic conditional correlation between returns and exchange rate changes. A bi-variate GJRGARCH- M model is employed to investigate all such elements of exchange rate exposure. We uncover significant evidence for the presence of multi elements of exchange rate exposure, some of which are not captured by the conventional measure of exposure. The paper contributes to the literature by suggesting a theoretical improvement in the area of measuring exchange rate exposure and citing evidence in support of it.

Keywords: exchange rate exposure; volatility spillovers; multivariate GARCH-M models; time-varying correlation JEL

 

For full paper: fmscresearch@sjp.ac.lk


Author Biography

P. Jayasinghe

Department of Business Economics, Faculty of

Management and Finance, University of Colombo,

Sri Lanka

A.K. Tsui

Departments of Economics, National University of

Singapore, 10 Kent Ridge Crescent, Singapore