The Effect of Intervaling on the Foreign Exchange Exposure of Australian Stock Returns

Abstract

This article analyzes the impact of movements in the Australian dollar/Japanese yen (AUDJPY) and the Australian dollar/US dollar (AUDUSD) exchange rates on the returns of the Australian equities market. Specifically, this paper investigates the nature of exchange rate exposure across increasing return measurement intervals, enabling an examination of both its short-term and its long-term effect on stock returns. Consistent with previous literature, considerable evidence of long-term exchange rate exposure is found. Further, it is found that in the long-term the Australian equities market in general is exposed to fluctuations in the AUDJPY, while only some Australian industries are exposed to movements in the AUDUSD. Finally, convincing evidence in terms of the determinants of foreign exchange exposure is not found (JEL G12, G15).

Asian foreign exchange risk exposure

“…On the other hand, investors who are confronted with this higher variability may find it particularly complex to distinguish in the short-run between temporary versus permanent exchange rate shocks. 25 In line with previous evidence (Chow et al, 1997a(Chow et al, , 1997bDi Iorio and Faff, 2001) the analysis of the evolution of the currency exposure for each individual firm across the 1, 4, 12 and 54 week return horizons reveals a strong positive correlation between the estimated exchange exposures. It appears hence that a firm's short-term, medium-term and long-term estimated exposure coefficients are intimately linked.…”

“…Di Iorio and Faff (2001), however, focus exclusively on the long-term exposure of industry portfolios, thereby ignoring the aggregation problems. The higher incidence of "long-run" exposure for Asian companies may however as well be attributed to the greater volatility attached to the selected Asian currencies.…”

“…We investigate whether the equity value of individual Asian internationally active firms are affected by exchange rate changes, whether the explored Asian foreign exchange risk exposure patterns are industryspecific, and whether the firm's exchange exposure is more evident across increasing time horizons. 3 The analysis of the latter is motivated by Chow et al's (1997aChow et al's ( , 1997b and Di Iorio and Faff's (2001) findings that foreign exchange exposure of individual firms increases with lengthening shareholder return horizons; short-horizon returns may contain errors made by investors in forecasting the long-term effects of current exchange rate changes. In this study, we also conduct an exploratory investigation of whether exchange rate exposure is determined by variables that are proxies for a firm's hedging incentives.…”

Exchange rate exposure among European firms: evidence from France, Germany and the UK

“…Jorion (1990), Booth and Rotenberg (1990), Bodnar and Gentry (1993), Bartov and Bodnar (1994), Choi and Prasad (1995) and Chow et al (1997a,b) have focused on the exposure of North American firms. Bodnar and Gentry (1993), Di Iorio and Faff (2001), Dominguez and Tesar (2001), Doidge et al (2002), Chow and Chen (1998) and He and Ng (1998) have examined the exposure in various economies outside the USA. Studies of European firms are relatively scarce.…”

Foreign exchange rate exposure of selected exporting companies from the Warsaw Stock Exchange

“…Technically, first of all, the problem of heteroskedasticity can occur for daily data (Di Iorio and Faff, 2001). Indeed, LM test (which results are not reported here) provided an evidence for heteroskedasticity of all considered variables.…”