Abstract:
Based on the theoretical framework provided by the International Capital Asset
Pricing Model (ICAPM), this paper uses time-varying second moments to
investigate exchange rate exposure betas. The study is carried out at country
level using stock indexes and trade-weighted exchange rates of a selected set of
emerging economies. Time-varying exchange rate exposure betas are obtained
with the help of a Multivariate GARCH-M model with explicit focus on the
non-orthogonality between exchange rate changes and market returns. Certain
aspects of the stochastic structure underlying the exposure betas are examined.
Findings of the paper indicate that, although they are likely to vary over time,
exchange rate exposure betas for Korea and Taiwan follow mean-reverting
long-memory processes. The presence of mean-reverting exchange rate
exposure coefficients has important implications for investment and hedging
strategies. However, the exposure beta for Thailand is most likely to be
characterized by a non-stationary unit root process
