برآورد زمان متغیر بتاهای ارزی با سرایت: شواهد جدید از بازارهای مالی توسعه یافته و های نوظهور

This paper examines the conditional time-varying currency betas from five developed and six emerging financial markets with contagion and spillover effects. We employ a trivariate asymmetric BEKK-type GARCH-in-Mean (MGARCH-M) approach to estimate the time-varying conditional variance and covariance of returns of stock market index, the world market portfolio and bilateral exchange rate between the US dollar and the local currency. The results show that the world market and currency risks are not only priced in the stock markets, but also time-varying. It is found that currency betas are much more volatile than the world market betas, and currency betas in the emerging markets are more volatile than those in the developed markets. We find empirical evidence of contagion effect and spillovers between stock market and foreign exchange market during the recent global financial crisis, and the effect is stronger in the emerging markets than that in the developed markets. Two applications are provided to illustrate the usefulness of time-varying currency betas.

Ever since the breakdown of the Bretton Woods system in the early 1970s, especially the increased globalization and recent global financial crisis, the volatility of exchange rates and its associated risks have become an increasingly important issue for international financial management. It is widely believed that firm value is sensitive to exchange rate movements as the fluctuations in exchange rates affect both the cash flow of a firm's operations and its discount rate employed to value a firm. However, empirical work on exchange rate exposure has found only limited support of a significant relationship between firm value and exchange rate changes. For instance, Jorion (1990) examines the exchange rate exposures of 287 US multinational corporations (MNCs) but finds that only a very small percentage exhibits significant exposure. Similarly, Bodnar and Gentry (1993) study industry-level exchange rate exposures for Canada, Japan and the USA, and find that only 9 of 39 two-digit industry portfolios exhibit significant exchange rate exposure at the 5% level from 1979 to 1988. A few empirical studies found significant exchange rate risk sensitivity under certain conditions. Bartov and Bodnar (1994) found that abnormal returns are related to lagged changes of exchange rates, which supports market inefficiency. The studies by Chow and Chen (1998) and Bodnar and Wong (2000), show the association between firm value and exchange rate changes becomes significant when the time horizon is increased. Williamson (2001) incorporates changes in the industry competitive environment and finds substantial time-varying foreign exchange exposure.1 Using a weighted market portfolios approach, Bodnar and Wong (2003) are the first to demonstrate the importance of the definition of the stock market risk factor. They find that, because large firms are over-represented in these indices, value-weighted market indices induce a positive bias in exposure coefficients. Recently several studies employ time-varying second moments to derive time-varying exchange rate exposure (see, for instance, Hunter, 2005, Lim, 2005, Tai, 2007, Tai, 2010 and Jayasinghe et al., 2011). Hunter (2005) analyzes the time-varying exchange rate exposure of small and large firms using size-based portfolios of the Fama-French-type, and Lim (2005) derives both market and currency betas at country level, with allowance for non-orthogonality between risk factors. Using industry data for Japan, Tai (2010) finds strong evidence of time-varying foreign exchange risk premium and significant exchange rate betas based on the tests of conditional asset pricing models using MGARCH-M approach where both conditional first and second moments of industry returns and risk factors are estimated simultaneously. Furthermore, the financial crises since the 1990s, especially the recent global financial crisis (GFC) in 2008 have boosted research on financial contagion and the transmission of shocks across the financial markets. Forbes and Rigobon (2002) differentiate the concepts between spillover and contagion for financial market inter-linkages. Tai (2007) found strong contagion effects between stock market and foreign exchange market from three emerging Asian countries during the 1997-98 Asian Financial Crisis. The most recent study by Walid et al. (2011) also found strong relationship between stock market and foreign exchange market by employing a Markov-Switching EGARCH model for four emerging countries over the period 1994–2009. Fu et al. (2011) use daily industry-level stock data over the period 1994-2007 to study volatility transmission between the Japanese stock and foreign exchange markets. Their results indicate that news shocks in the Japanese currency market account for volatility transmission in eight of the ten industrial sectors considered. It is observed that most of the early studies on foreign exchange rate exposures focus on the US stock market (with a few on Japan) and have generally ignored the possible impact of contagion and spillovers during the financial crisis period. It is also not clear how these empirical results relate to other countries, especially the emerging economies and markets. The purpose of this paper is to provide some new evidence on the foreign exchange rate exposures in both the developed and emerging markets by extending previous studies through the employment of an asymmetric trivariate BEKK-GARCH-in-Mean framework and the most recent daily dataset. We adopt the general framework of conditional international capital asset pricing model (ICAPM) proposed by Adler and Dumas (1983) and De Santis and Gerard (1998) to estimate the time varying currency betas and the time-varying market betas for eleven developed and emerging financial markets. Unlike the previous studies, we employ the Baba, Engle, Kraft and Kroner (BEKK) multivariate GARCH models of Engle and Kroner (1995) to estimate the conditional variance and covariance of return variables using a set of daily data spanning from 5 January 1999 to 25 July 2012. In particular, we compute the time-varying currency betas and market betas using estimates of the conditional variance and covariance of returns from country stock index, world market portfolio and changes in exchange rate of the trading country. We also examine the volatility transmissions from exchange rate shocks to conditional stock market returns volatility in different financial markets during the recent GFC. To the best of our knowledge, this is the first study that estimates such time-varying market and currency betas with contagion from an asymmetric trivariate BEKK-GARCH-in-Mean specification based on daily returns using the most updated dataset in both developed and emerging markets. The main advantage of the BEKK parameterization is that it guarantees the variance and covariance matrix to be positive definiteness during estimation, and the often alleged difficulty of interpreting parameters in BEKK models is not an issue. Our results indicate that currency betas are generally more volatile than the world market betas. In addition, currency betas in the six emerging markets are more volatile than those in the developed markets. We also find some evidence of long-memory in the estimated currency betas, and the existence of contagion effect between stock market and foreign exchange market for most of the financial markets during the recent GFC. These findings have important implications for investment and hedging strategies. The rest of this paper is organized as follows. The conditional version of international CAPM is outlined in Section 2. Section 3 presents the methodology employed to estimate currency betas and market betas from the conditional variance and covariance of return variables. Section 4 presents the sample data and preliminary results. In Section 5 we report and discuss the main empirical findings, and assess the usefulness of the conditional time-varying betas series as a source of information for decision making. Some concluding remarks are given in Section 6.

In this paper we have employed an asymmetric trivariate BEKK(3)-GARCH(1,1)-in-Mean model to examine the time-varying currency betas and market betas with contagion effects for the selected countries from the developed and emerging financial markets using a set of daily data including the returns of country indexes, the world market index and the exchange rate changes from 5 January 1999 to 25 July 2012. One notable feature of this study is that the time-varying currency betas are computed from the conditional variance and covariance of the return variables, thereby accommodating the conditional correlation between the bilateral exchange rate changes and market returns. As such, the estimated time-varying currency betas are more adequate than those estimates without taking the possible correlations into account. In addition, our model allows the prices of both world market and currency risks to be time-varying subject to a set of instruments. The results show that most of the selected instrumental variables are statistically significant explaining the dynamics of the prices of risk. The joint hypothesis test results confirm that the currency risk is not only priced in the concerned countries, but also time-varying, and that the market risk is also both priced and time-varying in these countries. This finding is consistent with some existing studies that both currency and market risks are priced factors. The instrumental variables DUSTP, SPX and MHDY are found to be significant in predicting the time variation of prices on the currency risk, while USDP, SPX and MHDY are significant on market risk. We also find evidence that there exist strong pure contagion and spillover effects between stock market and foreign exchange market in these financial markets. Moreover, the results reveal that all the six emerging markets show a much higher volatility in conditional currency betas in comparison with the developed markets, and the market beta in most countries tends to be less volatile than the currency betas, especially in the emerging markets. The US dollar exchange rate is found to be highly positively related to the returns on assets in some emerging markets, but negatively related to returns on assets in Canada. These findings have important implication for firms’ hedging strategies. The mean and standard deviation during the post-GFC period are found more than doubled that during the pre-GFC periods, and the recent GFC is found to have a much profound impact on the currency risk premiums in the emerging markets, especially in Indonesia, the Philippines and Taiwan. Based on the GPH test we find evidence of long-memory of the estimated currency betas and mean-reverting, which has important implications for trading strategies against currency risk in the exchange rate markets. The two applications of the estimated time-varying currency betas further demonstrate the usefulness of the time-varying exposures in strategic investment. The authors wish to thank the Journal Editor, Yasushi Hamao, the Associate Editor and an anonymous referee for their helpful comments and suggestions which have greatly improved the quality of the paper. We thank SCAPE at the Department of Economics, NUS for providing research support. The third author wishes to acknowledge the financial support from the Sumitomo Foundation.