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Exchange Rate Pegs and Foreign Exchange Exposure in East and South East Asia - page 17 / 33





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In most ways, the results are very similar to the findings for residual exposure. Of

the four major currencies, the dollar is still the most important for returns in most

countries. More than half of the firms in Indonesia, Korea, Malaysia, the Philippines, and

Singapore still appear to be exposed to the dollar. The results for Hong Kong are little

changed: as before, about a quarter of the firms show significant exposure to the yen, and

none appear to be exposed to the pound.

On the other hand, there are some differences. Even more firms in Singapore

appear to be exposed to the dollar, while their exposure to the yen has disappeared.

Surprisingly, most Japanese firms now appear to be exposed to the pound (many more than

are exposed to the dollar). Taiwan’s firms no longer exhibit exposure to the dollar.

A more uniform, but less meaningful, difference in the results is that the R 2 s are

much lower. That is, variations in the market return, now out of the regression, had

accounted for much of the explained variability of individual excess returns. The exchange

rates themselves, while extremely volatile and often significant, nevertheless do not

explain very much of the variation in individual returns. This is consistent with the bulk of

empirical work on asset returns, which in general is unable to explain much of the

variation in returns beyond that explained by their comovement with the market. Even

where significant, exchange rate variation by itself contributes only slightly to the

explained variation of returns.


Summary and Directions for Future Research

This paper has shown that many Asia-Pacific firms are exposed to foreign

exchange rate risk, particularly to fluctuations in the value of the U.S. dollar. Their


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