Asymmetric exchange rate exposure and its determinants: Analysis of the emerging market firms

Abstract

The wave of globalization has increased international trade and business to many folds. Countries moving toward capital account convertibility have enabled investors to invest in any part of the world. Consequently, financial integration has led to volatility in the currency and capital market. The variation in the exchange rate leads to fluctuation in stock return. However, the response of firms to currency fluctuation may vary for periods of appreciation and depreciation. The daily return of 260 firms was analyzed from 2004 to 2019. The study uses the orthogonalized model developed by Di Iorio and Faff (2000) and Koutmos and Martin (2003). The result shows that 66.54% of firms were affected by currency fluctuations and 12.2% of firms responded asymmetrically to periods of appreciation and depreciation. The analysis revealed that service sector firms are more exposed to currency fluctuation than the manufacturing sector. The study also explores a comprehensive range of determinants of exchange rate exposure. The research revealed that size and quick ratio are inversely related while asset turnover, foreign sales, and book-to-market value have a positive relationship with exchange rate exposure. The research will act as a guiding force to the policymakers to make an efficient exchange rate policy while portfolio managers can use the findings of the study in forming hedging strategies