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Exchange Rate Pegs and Foreign Exchange Exposure in East and South East Asia - page 10 / 33

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The sample period, 1990 to 2002, spans many important changes in the economic

environment of these countries. In addition to the dramatic macroeconomic changes of the

nineties, there have been sweeping financial reforms in many of the countries, including a

liberalization of the regulation of foreign exchange derivatives, which can be used to hedge

some exposure.14 Therefore, we also examine how the foreign exchange exposure has

varied over time. We split the full sample into four periods. Each period is three years

long: 1990 to 1992, 1993 to 1995, 1996 to1998, and 1999 to 2002. Notice that the third

period, 1996 to 1998 includes the Asian Crisis and its immediate aftermath. We add

interactive time dummies to Equation 1 to capture the period-by-period exposure. This

gives us the following regression equation:

4

( 2 ) U S j t w w t h h t r r r $ , , , 0 , + + + = E J J J

j =1

Dj,tsUS$,t

4

  • +

    E j,euro

j =1

Dj,tseuro,t

4

4

t i t t j j t t j j v s D s D , , £ , £ , , ¥ , ¥ , + + + E E

j =1

j =1

where each D j is a dummy variable:

D1

= 1, January 1, 1990 through December 31, 1992 = 0, otherwise

D2

= 1, January 1, 1993 through December 31, 1995 = 0, otherwise

D3

= 1, January 1, 1996 through December 31, 1998 = 0, otherwise

D4

= 1, January 1, 1999 through March 7, 2002 = 0, otherwise

Table 3 summarizes the estimation results. We again report the fraction of firms

14 If firms have increased their use of derivatives to hedge their foreign exchange exposure, we might expect to find that exposure has fallen over time. Chamberlain, Howe and Popper (1997) find that U.S. firms that report using foreign exchange derivatives indeed do exhibit lower foreign exchange exposure than the firms that do not. Chiao and Hung (2000) consider the timing of financial liberalizations in Taiwan, and link the liberalizations to changes in the foreign exchange exposure of exporting firms.

9

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