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