Exchange Rate Exposure of Stock Returns at Firm Level

40 Pages Posted: 7 Jul 2014

See all articles by Prabhath Jayasinghe

Prabhath Jayasinghe

University of Colombo - Department of Business Economics

Gamini Premaratne

University of Illinois at Urbana-Champaign - Department of Economics; University of Brunei Darussalam

Date Written: July 6, 2014

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

JEL Classification: F3, F23, F31, G15

Suggested Citation

Jayasinghe, Prabhath and Premaratne, Gamini and Premaratne, Gamini, Exchange Rate Exposure of Stock Returns at Firm Level (July 6, 2014). Available at SSRN: https://ssrn.com/abstract=2462879 or http://dx.doi.org/10.2139/ssrn.2462879

Prabhath Jayasinghe (Contact Author)

University of Colombo - Department of Business Economics ( email )

Department of Business Economics
Colombo 3, Western
Sri Lanka

Gamini Premaratne

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

University of Brunei Darussalam ( email )

Jalan Tungku Link
Gadong, BE1410
Brunei

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