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Exchange Rate Pegs and Foreign Exchange Exposure in East and South East Asia - page 7 / 33

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to a time series regression of each firm’s excess return on a constant and on the excess

market returns. That is, we estimate the parameters ȕUS$, ȕ, ȕ£ and ȕ¥ (along with J0, Jh,

and Jw) in the following equation:

(1)

ri,t = J 0 + J h rh,t + J w rw,t

t U S U S s $ , $ + E

t e u r o e u r o s , + E

t s , ¥ ¥ + E

t s , £ £ + E

  • +

    ui,t

where time and individual firms are indexed by t and by i; and, excess returns and

exchange rate changes are defined below.

r ,t

Ł

8 Return on equity i, less the return to the local short-term government asset.

rw,t

Ł International market return less the U.S 90 day Treasury bill return, denominated ex post in local currency.

rh,t

Ł Local market return less the local short-term government asset.

sUS $, t

Ł Nominal local currency appreciation or depreciation against the U.S. dollar.

seuro,t

Ł Nominal local currency appreciation or depreciation against the euro (prior to 1999 we use the German mark).

s¥,t

Ł Nominal local currency appreciation or depreciation against the Japanese yen.

s£,t

Ł Nominal local currency appreciation or depreciation against the U.K. pound.

ui,t

Ł Regression residual.

Table 2 summarizes some of the key results of the estimation of Equation 1 for

each firm using weekly returns, and where the exchange rate appreciation or depreciation

is defined as the percentage change in the exchange rate over the week.9 Columns one

8 In additional estimates, available from the authors, we define r,t as a return generated from a portfolio of five stocks. We find that somewhat more of these portfolio returns appear to be sensitive to exchange rates;

but the overall picture is roughly similar. Definitions and sources of the stock market and government returns are given in Appendix Tables 1 and 2. 9

6

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