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Exchange Rate Exposure of Sectoral Returns and Volatilities: Further Evidence From J apanese Industrial Sectors
Author(s) -
Jayasinghe Prabhath,
Tsui Albert K.,
Zhang Zhaoyong
Publication year - 2014
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12061
Subject(s) - economics , econometrics , bivariate analysis , exchange rate , heteroscedasticity , volatility (finance) , conditional variance , stock (firearms) , autoregressive conditional heteroskedasticity , financial economics , monetary economics , statistics , mathematics , mechanical engineering , engineering
In this paper we argue that the commonly employed exposure coefficient/beta is inadequate for capturing the entire impact of exchange rate changes on firms' future operating cash flows. Instead, we employ the bivariate Glosten–Jagannathan–Runkle generalized autoregressive conditional heteroskedasticity mean model to investigate four aspects of exchange rate exposure, including sensitivity of stock returns to exchange rate changes, sensitivity of stock returns to the volatility of exchange rate changes, sensitivity of conditional variance of returns to exchange rate volatility, and the dynamic conditional correlation between returns and exchange rate changes, respectively, using data from 10 industrial sectors in J apan. We find significant evidence of such exchange rate exposure which is not captured by the conventional measure. The diagnostic statistics confirm the adequacy of our model, and, hence, the robustness of the results.