Analysing Time-Scales Currency Exposure Using Maximal Overlap Discrete Wavelet Transform (MODWT) for Malaysian Industrial

Abstract

Based on dynamic nature of foreign exchange rate risk toward Malaysian firms across different time horizons, this paper is motivated to investigate the multiscale effect of currency exposure using wavelet analysis for 71 industrial products and services firms listed on the main market of Bursa Malaysia. The study employed Daubechies Least Asymmetric as a special wavelet filter in Maximal Overlap Discrete Wavelet Transform (MODWT) method to decompose a given time series into different time-intervals from January 2000 till December 2020. Specifically, the study found that there was non-monotonic exchange risk concentration from low to high time scale. As a result, as time horizon widened, the firm profitability becomes more sensitive to the foreign currency fluctuations. Besides, majority of the sample firms were negatively exposed to the Euro (EUR), and Japanese Yen (JPY) indicating that Malaysia industrial firms were benefited from depreciation of these currencies. Given the significant time scale effect of currency exposure, firm managers and investors should incorporate the length of transactions in foreign exchange risk assessment for greater accuracy and timely decision making in hedging strategies.

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