Exchange rate exposure of stock returns at firm level

Gamini Premaratne and Prabhath Jayasinghe
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Prabhath Jayasinghe: NUS
Authors registered in the RePEc Author Service: Gamini Herath

International Finance from EconWPA

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.

Keywords: Exchange rate exposure; GARCH; t distribution; Asymmetric volatility (search for similar items in EconPapers)
JEL-codes: F3 F23 F31 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2005-03-11
Note: Type of Document - pdf; pages: 40
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0503004

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