Exchange Rate Exposure of Sectoral Returns and Volatilities: Evidence from Japanese Industrial Sectors

Ananda Jayawickrama and Tilak Abeysinghe
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Ananda Jayawickrama: NUS

Microeconomics Working Papers from East Asian Bureau of Economic Research

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.

Keywords: exchange rate exposure; asymmetric volatility spillovers; GARCH-type models; conditional correlation (search for similar items in EconPapers)
JEL-codes: C22 F31 G12 G15 (search for similar items in EconPapers)
Date: 2007-06
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