The Asian Crisis Exchange Risk Exposure of US Multinationals PDF

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MF
33,9
The Asian crisis exchange risk

exposure of US multinationals
Willem F.C. Verschoor and Aline Muller
710
Nijmegen School of Management, Radboud University Nijmegen,

Nijmegen, The Netherlands
Abstract
Purpose This paper aims to increase understanding of the (time-varying) relationship between
exchange rates and stock prices at the individual firm level. Rather than analyzing the impact of
exchange rate movements on firm value by regressing multinationals stock returns on exchange rate
changes, it is proposed to examine the impact of increased exchange rate variability on the stock
return volatility of US multinationals by focusing on the 1997 Asian financial turmoil.
Design/methodology/approach In a first step, it is investigated whether the enhanced
uncertainty about the future performance of US multinationals active in Asia resulted in an increased
stock return variability. The second step separates the impact of increased exchange rate variability
on the stock return volatility of US multinationals into systematic and diversifiable risk.
Findings It is found that the stock return variability of US multinationals increases significantly in
the aftermath of the financial turmoil. In conjunction with this increase in total volatility, there is also
an increase in market risk (beta) for US multinationals. Moreover, trade- and service-oriented
industries appear to be particularly sensitive to these changing exchange rate conditions.
Practical implications If the additional risk imparted to exposed firms from increased exchange
rate variability is systematic in nature, it will affect the required rate of (equity) return (i.e. investors
demand higher returns for holding the firms shares). Consequently, this effect of exchange rate
fluctuations increases the cost of (equity) capital for US multinationals with real foreign operations in
the crisis countries.
Originality/value This paper demonstrates the impact of increased exchange risk on stock return
volatility and market risk.
Keywords Multinational companies, Financial risk, Asia, Exchange rates, Stock returns
Paper type Research paper
Managerial Finance
Vol. 33 No. 9, 2007
pp. 710-740
# Emerald Group Publishing Limited
0307-4358
DOI 10.1108/03074350710776253
1. Introduction
On July 2nd, 1997 the Thai baht abandoned its peg to the US dollar. The change from
highly stable exchange rate regimes in Asia to floating regimes was associated with a
sharp increase in exchange rate variability. Within one year, the Asian stock markets
declined on average between 40 and 60 per cent, while the currencies of Indonesia,
South Korea and Thailand each lost nearly half of their value[1]. It is a common belief
that the most recent Asian financial crisis is more widespread than previous crises, and
hence is exerting a greater effect on commodity prices, financial markets and economic
activity throughout the world; the perception has arisen that the crisis has been more
virulent in its impact on the affected local and global economies. Worldwide economic
growth slowed, commodity prices were brought to a historical low, risk premiums in
debt markets increased, both stock market volatility and capital flows enhanced while
confidence indicators slumped around the globe. Furthermore, the Asian crisis appears
to be more deeply rooted in financial imbalances in the private sector than in the public
sector financial problems that characterized the 1980s debt crisis and the 1994-1995
Mexican crisis. The wide currency fluctuations experienced during the 1997 Asian
crisis raised a variety of questions not only about their impact on affected economies,
but also about their influence on the potential vulnerability of multinational firms to
foreign exchange risk.
The purpose of this paper is to increase our understanding of the (time-varying)

relationship between exchange rates and stock prices at the individual firm level.
Rather than analyzing the impact of exchange rate movements on firm value by
regressing multinationals stock returns on exchange rate changes, we consider the
foreign exchange risk exposure puzzle from a different angle. Motivated by Bartov et al.
(1996) and Chen and So (2002), we examine the impact of increased exchange rate
variability on the stock return volatility of US multinationals by focusing on the 1997
Asian financial turmoil. More specifically, we analyze the change in US stock market
risk in response to the onset or fear of an exchange rate regime shift in Asian
countries where these US companies are internationally active. Significant contribution
of increased exchange rate variability to systematic risk would imply that the cost of
equity capital for these firms increases relative to that of non-multinational (domestic)
firms.
The current study complements previous work and makes several main
contributions. Using a sample of 372 US multinational firms, we find that the increase
in exchange rate variability around the change from highly stable exchange rate
regimes to floating regimes is associated with a statistically significant increase in
stock returns volatility of US multinationals that are engaged in foreign sales activities
with these turmoil markets compared with the control firms. The breakdown between
systematic and diversifiable risk shows moreover that the stock market risk (beta) of
these US multinationals increases significantly during periods of increased exchange
rate uncertainty. Furthermore, we demonstrate that the trade, services, finance,
insurance and real estate as well as the agriculture, mining and construction sectors
are particularly sensitive to exchange rate crises uncertainty. Finally, it appears that
small capitalization firms are especially exposed to changes in the international trade
environment.
The remainder of this paper is organized as follows. The first section contains the
research design. Section two presents the Asian exchange rate movements against the
US dollar and the US multinational firm-level data set. In section 3, we examine
the impact of increased exchange rate variability on stock return volatility of US
multinationals. In section 4, the estimates of the extent to which the riskiness of US
multinationals are exposed to increased exchange rate uncertainty are presented and
analyzed. Section 5 closes with some sensitivity analyses across industries and market
capitalization classes. The final section concludes our findings.
2. Research design
The financial crisis triggered in Thailand in July, 1997 sent shock waves throughout
Southeast Asia and the globe. Whether the observed contagion was the result of
financial panic or whether it was rational is still a matter of intensive debate that has
been extensively covered in the literature[2]. In this paper, we take the view that the
Asian currency crisis was primarily propagated through rational channels and
concentrate on the role played by existing trade relationships in the transmission of the
crisis[3,4]. Although the crisis was felt around the world we focus particularly on the
spread of the Asian currency crisis towards US stock markets[5,6].
The change from highly stable exchange rate regimes to floating regimes and the
resulting volatile currency movements were an important source of macroeconomic
uncertainty for US multinational firms with foreign trade relationships in Asia. The
resulting macroeconomic confusion wholly modified the Asian economic environment
and remodeled capital flows around the world. Empirical studies demonstrate that the
Exchange risk
exposure of US
multinationals
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712
rise in the volatility of exchange rates and the subsequent increase in uncertainty and
risk has significant consequences on trade flows[7]. We expect that the large
exchange rate swings in the aftermath of the Asian currency crisis altered the trade
terms between Asia and the US and that the increased exchange rate variability
contributed to the uncertainty of the economic and financial environment of US
multinationals active in Asia. The rapid expansion of currency crises to world stock
markets, through an increase in the observed volatility of financial markets and capital
flows around the world, has led academics and investors to re-evaluate the impact of
(increased) exchange rate fluctuations on stock markets[8].
In this paper, we empirically explore the (time-varying) relationship between Asian
exchange rates and US stock prices at the individual firm level. In a first step, we
investigate whether the enhanced uncertainty about the future performance of US
multinationals active in Asia resulted into an increased stock return variability. Even if
firms that did not entertain trade relationships with Asia countries may have been
indirectly influenced by the economic waves following the crisis, there is no doubt that
multinational firms that had real operations in the crisis countries were the first
economic actors to be affected. We, therefore, expect the increase of the stock return
variability to be more important for US multinationals with real operations in Asia
than for other US firms. Motivated by Bartov et al. (1996), we hence create a control
sample of firms in the same line of business and of similar size (market capitalization)
to test for a different impact of the currency crisis on non-Asia oriented firms. This
enables us further to control for the influence of other confusing forces and for possible
confounding factors related to industry or firm size.
The second step separates the impact of increased exchange rate variability on the
stock return volatility of US multinationals into systematic and diversifiable risk.
Whether some proportion of this enhanced stock return variability is diversifiable or
not has important implications for the firm and investors. In a well-diversified
portfolio, only systematic risk, which cannot be diversified away, receives
compensation through higher required rates of return. Thus, an increase in a firms
systematic risk with respect to the US equity market portfolio leads to an increase in
the required rate of return and an increase in the cost of (equity) capital. To measure the
systematic risk (beta) of US companies we use the augmented market model suggested
by Jorion (1990). The estimation of this multifactor model enables us to analyze
whether increased exchange rate uncertainty influences the sensitivity of US
multinational firms to market risk (beta) and whether the impact of exchange rate
movements on the equity value of these firms rises during periods of increased
exchange rate variability. Intuitively, the contribution of exchange rate uncertainty to a
firms sensitivity to market risk can be motivated by the impact of exchange rate
volatility on its trade activities and hence on its business risk as well as by the
existence of other repercussions to the fundamentals of such firms that are not shared
to the same degree by the market as a whole.
Furthermore, the augmented market model allows us to verify whether the 1997
Asian financial crisis affected the foreign exchange risk exposure of US multinationals
defined as the sensitivity of firm value to exchange rate movements. For the past
decade, many researchers have been empirically investigating the foreign exchange
risk exposure of multinational firms. Despite a multinationals extensive involvement
in international activities and the implication of economic theory, existing literature
has met with limited success in identifying significant contemporaneous correlations
between exchange rate fluctuations and US stock returns[9]. The controversy has
stimulated the interest of many researchers in similar issues involving other countries,
especially those with market characteristics different from the USA while motivated
others to explain the difficulty in obtaining stable and significant measures of
exchange exposure[10, 11].
Overall, the examination of increased exchange rate variability on the stock return
volatility of US multinationals provides an interesting framework for determining the
importance and time-varying nature of the relation between exchange rates and stock
prices of multinational firms. Moreover, this framework provides certain advantages
over existing studies. First, since variances are estimated over a multiperiod window,
our analysis does not suffer from the potential temporal instability of the sign of the
exposure (Bartov and Bodnar, 1994) and reduces the necessity that the impact of the
exchange rate on stock prices be contemporaneous (Bartov et al., 1996). Second,
analyzing the impact of large exchange rate swings caused by currency crises, we
mitigate the effects of hedging activities because of the relative unexpectedness of
these volatile currency movements[12]. Third, it enables us to test the hypothesis that
the impact of large magnitude currency movements on trade spillovers hence, on firm
value is more significant than the impact of small fluctuations[13]. Under these
conditions and in the light of the evidence discussed above, we expect that US
multinationals with real operations in Asia have greater exposure to exchange rate risk
during the period of increased exchange rate variability. Considering that their trading
activities were directly influenced by the changing currency environment, this impact
should be most identifiable for these Asia-oriented US companies. Finally, as
exchange rate movements primarily affect firm value through their impact on trade
flow, US multinationals that produce or consume non-traded goods should be less
affected by the changes in their currency environment. Similarly, due to the positive
impact of a US dollar appreciation on US importing activities and its negative effect
on US exporting activities, we suppose that US industry sectors that rely heavily on
both exporting and importing activities are less influenced by changes in foreign
exchange rates. Industries that primarily serve the consumer sectors are presumed
more exposed to currency fluctuations than institutional-oriented industries. If we limit
ourselves to examine aggregate results, we ignore these differential effects across
industries. In this paper, we, therefore, use an industry-level variation to identify which
types of sectors are most affected by the increased exchange rate variability. To
strengthen our analysis further, we examine our findings across different market
capitalization categories.
3. Data description
3.1 US multinational firm-level data set
In this study, we examine how the Asian currency crisis affected US wealth. As
suggested by Forbes (2004), trade linkages (either through bilateral trade or
competition in third markets) are important transmission channels of exchange rate
shocks. Although firms might not entertain trade relationships with the crisis
countries directly, they might be indirectly affected by the economic waves following a
financial crisis; there is no doubt that multinational firms that have real operations in
the crisis countries are the first economic actors to be influenced by these wide
exchange rate swings. We therefore only include in our test sample US multinationals
with real production and/or trade operations in Asian countries. To identify these
firms, we first select multinational companies based on the information provided in the
1995 and 1999 versions of the Directory of American Firms Operating in Foreign
Exchange risk
exposure of US
multinationals
713
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714
Countries. As we only include listed firms in our study, we check the firms for their
weekly stock market return availability in the University of Chicago Center for
Research in Security Prices (CRSP). We moreover restrict our sample to companies
with at least complete six-month price information both for the pre-crisis and the postcrisis windows. This reduces our sample to 372 firms. These multinationals form
together four different test samples depending on the crisis country where they are
active[14].
In order to prevent confounding inferences concerning the causes of the changes in
the stock return variability of the sample firms, we construct for each test sample a
matching control sample. In order to create matching control samples consisting of
firms in the same line of business and of similar size as each of the sample firms, we go
through the following procedure. First, within the CRSP database, we identify for each
sample firm all the firms, listed on an US stock market, that were active in the same
four-digit industry sector during the crisis period. Among these firms we then select
three or four firms within the same market capitalization category as the sample firm.
As a result, we pick out a total of 1,360 companies[15]. These control firms are either
domestic or multinational companies that have not any direct production or trade
relationships with Asia and are called non-Asia oriented firms in the remainder of
this paper.
3.2 Economic factors
We use two economic factors in this study: the market risk factor and the exchange rate
risk factor. The proxy for the market portfolio is the equally weighted US stock market
index as provided by the University of Chicago CRSP database. The exchange rate risk
factor is alternately measured as the bilateral continuously compounded exchange
with the US dollar (defined as the local currency for Indonesia, Malaysia, Korea and
Thailand per US dollar).
3.3 Asian exchange rate fluctuations
The year 1997 marked the end of pegged exchange rate regimes in Asia. Thailand was
the first Asian country to break its official parity on July 2, 1997[16]. A couple of days
later, the Bank Negara Malaysia resigned intervening to smooth the fluctuations of the
ringgit and let the currency float. Indonesia and Korea were forced to abandon their
pegged exchange rate systems, respectively, in August and December, 1997. Table I
provides a brief overview over the exchange rate arrangements before and after the
currency crisis and Figure 1 displays the evolution of these four Asian currencies
against the US dollar from July 1995 till January 2000.
Figure 1 shows that the change from highly stable exchange rate regimes to floating
regimes was associated with a huge increase in exchange rate variability. Moreover, the
foreign exchange market became much more volatile during the crisis, whereas the
value of these Asian currencies nearly halved. This observation is confirmed in Table II
containing the descriptive statistics of the Asian exchange rate series before and after
their respective regime shifts. Both magnitude and variability of currency movements
dramatically increased around the change in the exchange rate regime.
4. Exchange rate crisis and stock return variability
To examine empirically the link between exchange rate uncertainty and stock return
variability, we measure the variance of the stock returns of our sample and control
firms over two approximately two-year windows[17]. The first window precedes the
Country
Crisis date
Thailand
Malaysia
Indonesia
Korea
July 1997
July 1997
August 1997
December 1997
Depreciationa against
USD at the crisis
date (%)
Declared exchange
rate regime
before the crisis
Exchange rate
regime into which
the country switched
after the crisis
24.34
4.19
16.78
45.64
Basket peg
Managed float
Crawling band
Exchange rate band
Independently floating
Managed floatb
Notes: aNominal depreciation against the US dollar during the crisis month;bMalaysia switched to
the conventional peg arrangement in September 1998, a year after the currency crisis started
Source: IMF Annual Report on Exchange Arrangements and Exchange Restrictions, various
numbers
Exchange risk
exposure of US
multinationals
715
Table I.
Crisis dates and
exchange rate
arrangements
Figure 1.
Exchange rates of the US
dollar against Asian
currencies
date of the decision to let the currency float, whereas the second window covers the
period after this decision was taken. To evaluate the significance of the change in stock
return variability across the two periods, we use the following Chi-squared statistic:
X
ln pi
2 2N 2
i1;N
where pi is the p-value for the F-test of the test of the change in variances for firm i from
the pre-crisis window to the post-crisis window and N is the number of firms included
in the sample. Under the null hypothesis of no change in stock return variance across
the two sub-periods, the sample distribution of the F-statistics is random and the test
statistic is asymptotically distributed 2 with 2N degrees of freedom[18].
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Table II.
Descriptive statistics of
Asian exchange rate
movements against the
US dollar
Thailand
Malaysia
Indonesia
Korea
Before the currency regime shift

Mean
Median
Maximum
Minimum
SD
Skewness
Kurtosis
Observations
4.86E-05
0.000539
0.040652
0.045832
0.006955
1.137771
30.66901
104
0.000321
9.86E-05
0.009189
0.014002
0.002931
0.818569
8.304157
104
0.001462
0.000671
0.050408
0.006542
0.006082
6.15655
49.33361
90
0.003603
0.001233
0.067925
0.01229
0.010141
4.331855
25.47884
102
After the currency regime shift

Mean
Median
Maximum
Minimum
SD
Skewness
Kurtosis
Observations
0.003781
0.000728
0.119739
0.085482
0.028887
0.556685
6.934636
105
0.008349
0.008121
0.134524
0.089084
0.031673
0.367082
7.140746
61
0.009272
0.005001
0.384237
0.202118
0.079235
1.397956
9.102251
103
0.0003
0.0028
0.253863
0.129046
0.040609
3.125792
21.36434
107
Notes: This table provides summary statistics on weekly log price changes of four Asian
currencies the Thai baht, the Malaysian ringgit, the Indonesian rupiah and the Korean won. The
sample periods are respectively, for Thailand from 5 July 1995 till 25 June 1997 (before the regime
shift) and from 2 July 1997 till 30 June 1999 (after the regime shift); for Malaysia from 19 July
1995 till 9 July 1997 (before the regime shift of 1997) and from 16 July 1997 till 26 August 1998
(after the regime shift of 1997 and before Malaysia returned to a conventional peg arrangement in
September 1998); for Indonesia from 22 November 1995 till 6 August 1997 (before the regime
shift) and from 13 August 1997 till 28 July 1999 (after the regime shift); and for Korea from 6
December 1995 till 12 November 1997 (before the regime shift) and from 19 November 1997 till 1
December 1999 (after the regime shift)
Data source: Global Financial Data
The first four columns of Table III report the summary statistics of the cross-sectional
distribution of firm-level stock return variances before and after the crisis date for the
test samples. The significance levels of the 2 statistics reveal that the hypothesis of no
change in the return variances of US multinational firms active in the crisis countries is
strongly rejected. The last four columns describe the corresponding analysis for the
control samples. We can observe that for the control firms we also reject the null
hypothesis in favor of the alternative hypothesis that the volatility of stock returns of
the control firms was higher in the post-crisis sub-period than in the pre-crisis subperiod. As suggested by Bartov et al. (1996), this may be due to the fact that large shocks
in exchange rate markets are correlated with other forms of increased macroeconomic
uncertainty and may therefore affect all firms independently of their foreign
involvement. Furthermore, Asian large currency swings caused price and income effects
that not only affect direct bilateral trade linkages, but also price competition and income
repercussion in third markets, thereby indirectly influencing the entire US stock market.
Table III also reports the results of a non-parametric Wilcoxon signed-rank test.
This test, that verifies the null hypothesis of no shift in the Median variance of stock
returns after the crisis, has the advantage of being less sensitive to outliers than the
Before
crisis
Test sample
After
Test
crisis statistic Significance
Panel A: Thailand, July 1997

Mean 0.00240 0.00372 1417.97a
Median 0.00153 0.00270
5.03b
Q1
0.00048 0.00075
Q3
0.01333 0.01216
Panel B: Malaysia, July 1997
Mean 0.00294 0.00393 1910.25a
Median 0.00149 0.00303
6.13b
Q1
0.00041 0.00116
Q3
0.07116 0.01261
Panel C: Indonesia, August 1997
Mean 0.00215 0.00381 1253.55a
Median 0.00152 0.00300
5.39b
Q1
0.00039 0.00035
Q3
0.04184 0.05636
Panel D: Korea, December 1997
Mean 0.00333 0.00546 1971.80a
Median 0.00183 0.00387
5.38b
Q1
0.00041 0.00095
Q3
0.01240 0.02344
Before
crisis
Control sample
After
Test
crisis statistic Significance
0.0000
0.0000
Mean
Median
Q1
Q3
0.00254
0.00154
0.00032
0.02028
0.00405 5266.35a
0.00266
8.77b
0.00060
0.04538
0.0000
0.0000
0.0000
0.0000
Mean
Median
Q1
Q3
0.00300
0.00180
0.00033
0.01491
0.00462 5832.89a
0.00323
8.32b
0.00029
0.02239
0.0000
0.0000
0.0000
0.0000
Mean
Median
Q1
Q3
0.00204
0.00121
0.00033
0.01232
0.00319 3785.82a
0.00239
8.40b
0.00052
0.01448
0.0000
0.0000
0.0000
0.0000
Mean
Median
Q1
Q3
0.00260
0.00165
0.00002
0.02339
0.00446 8643.38a
0.00327
11.82b
0.00052
0.02363
0.0000
0.0000
Exchange risk
exposure of US
multinationals
717
Notes: The numbers are summary statistics for the variance of firm-level stock returns. Q1 and
Q3 represent the first and third quartiles of the distribution, respectively. The test for the mean is
a chi-squared statistic to test whether the individual firm-level changes in variance are jointly
significant for the different samples. The test for the mean is a chi-squared statistic for the test
that the individual firm-level changes in variance for the sample are jointly significant (a). The
test statistic for the median is a Wilcoxon signed-rank (median) test (b). Both reported significance
levels are for one-tailed tests against the alternative that the variances increase between the two
periods. The sample periods are, respectively: for Thailand from 5 July 1995 till 25 June 1997
(before the regime shift) and from 2 July 1997 till 30 June 1999 (after the regime shift); for
Malaysia from 19 July 1995 till 9 July 1997 (before the regime shift of 1997) and from 16 July 1997
Table III.
till 26 August 1998 (after the regime shift of 1997 and before Malaysia returned to a conventional
Stock return variability
peg arrangement in September 1998); for Indonesia from 22 November 1995 till 6 August 1997
across exchange rate
(before the regime shift) and from 13 August 1997 till 28 July 1999 (after the regime shift); and for regimes Cross-sectional
Korea from 6 December 1995 till 12 November 1997 (before the regime shift) and from 19 distribution of firm-level
November 1997 till 1 December 1999 (after the regime shift)
stock return variances
previously reported 2 statistic. The results in Table III confirm, for both test and
control samples, the presence of a statistically significant change in the distribution of
stock return volatilities across the two sub-periods.
As we nevertheless expect that the test sample firms are more exposed to the
increased exchange rate variability in the crisis countries, we compare the distribution
of the relative change in the total stock return variability of the test samples with the
corresponding distribution of the control samples. We therefore use two tests. The
t-test verifies the null hypothesis that the mean of distribution of the relative change in
the total stock return variability of the test sample is equal to the mean distribution of
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the relative change in the total stock return variability of the control sample, while the
non-parametric rank-based Wilcoxon test examines the equality of the medians.
Table IV provides explicit results regarding the relative firm-level stock return
variances for test and control samples. The results of Table IV suggest that for both the
Thai and the Korean crises, there is no statistically significant difference in the change
of stock return volatility between the test and the control sample. The analyses of the
Malaysian and Indonesian crises, however, reveal that the stock return volatilities of
the test sample firms increased significantly more than the volatilities of their control
sample counterparts[19].
Test sample
Control sample
Comparison of the
distributions
Post-crisis
Post-crisis
variance/Pre-crisis variance/Pre-crisis
variance
variance
Test
statistic Significance

Mean
1.99888
Median
1.84199
Maximum
4.62023
Minimum
0.56918
1.95056
1.77375
4.78443
0.46071
H0. equality of means
0.162
0.8717
H0. equality of medians
0.672
0.5018

Mean
2.13407
Median
2.01649
Maximum
6.54202
Minimum
0.18151
1.92710
1.70584
5.65564
0.47039
1.572
0.1167
2.630
0.0085*

Mean
2.13216
Median
2.02807
Maximum
4.84700
Minimum
0.53732
1.84041
1.75569
5.03572
0.47944
2.728
0.0067*
2.135
0.0328*
Panel D: Korea,
Mean
Median
Maximum
Minimum
1.97008
1.82318
5.22044
0.23744
0.670
0.5034
0.731
0.4647
December 1997
1.98823
1.86350
4.80327
0.76287
Notes: The summary statistics describe the distributions of the relative changes in firm-level
variances from the pre-crisis period to the post-crisis period. The test statistics report a t-test on
the difference in means between the distributions of the test and control sample ratios and a
Wilcoxon rank-sum test on the shift in median values between the distributions. The significance
levels are for the rejection of the null hypothesis that the distributions of test firms ratios are
equal to the distributions of control firms ratios. *indicates 5 per cent significance level. The
sample periods are, respectively: for Thailand from 5 July 1995 till 25 June 1997 (before the
regime shift) and from 2 July 1997 till 30 June 1999 (after the regime shift); for Malaysia from 19
Table IV.
July 1995 till 9 July 1997 (before the regime shift of 1997) and from 16 July 1997 till 26 August
Stock return variability
1998 (after the regime shift of 1997 and before Malaysia returned to a conventional peg
across exchange rate
regimes Cross-sectional arrangement in September 1998); for Indonesia from 22 November 1995 till 6 August 1997 (before
the regime shift) and from 13 August 1997 till 28 July 1999 (after the regime shift); and for Korea
distributions of relative
from 6 December 1995 till 12 November 1997 (before the regime shift) and from 19 November
firm level stock return
1997 till 1 December 1999 (after the regime shift)
variances
Overall, these findings suggest that the stock return variability of multinationals is
positively related to exchange rate variability. Correspondingly, the occurrence of a
currency crisis has a significant positive impact on the stock return variability of both
our test and control samples. Whereas US domestic and multinational firms without
real operations in the crisis countries seem to be affected by the financial repercussions
caused by the increased exchange rate uncertainty, it appears nevertheless that US
multinationals with close trading and production activities in the crisis countries are
more sensitive to exchange rate risk in the aftermath of a crisis.
5. Exchange rate variability, currency exposure and market risk (beta)
For international investors and financial managers it could have important implication
whether the documented increase in the total stock return variability of US
multinationals resulting from the financial turmoil can be diversified away or whether
it causes additional systematic risk. As in efficient markets only systematic risk
receives compensation through an increase in the required rate of return, the
breakdown between systematic and diversifiable risk provides an insight into the
relative cost of capital of US multinationals active in the country crisis and other nonAsia oriented multinational firms.
Furthermore, it is highly presumable that the sensitivity of US multinationals to
fluctuations in exchange rates changed after the exchange rate regime shifts. As was
discussed in section 2, the magnitude and variability of Asian exchange rate
fluctuations grew significantly in the aftermath of the crisis. While Asian currencies
were mostly restricted within relatively narrow bandwidths before the crisis, the
unexpected large currency swings after the crisis had severe economic repercussions
on trade and capital flows. The huge consequences of these fluctuations on US trade
activities lead us to believe in an enhanced vulnerability of US multinationals to Asian
foreign exchange rate risk in the aftermath of the crisis.
To empirically address these issues, we estimate for each firm, the sensitivity of its
stock returns to US stock market risk as well as to Asian foreign exchange rate
movements. The exchange exposure of a firm can be measured by the following
augmented market model:
Rit i i Rmt i Xt "it
where Rit designates the total return of firm i in period t, Rmt the overall US stock
market return in period t, i firm is return sensitivity to US market fluctuations, Xt the
rate of return on the Asian currenciy vis-a`-vis the US dollar (measured as the Asian
exchange price of the US dollar), i firm is exposure to exchange rate changes
independent of the effect these variations have on the overall market, and "it denotes
the white noise error term. Hence i is the exchange rate exposure measure because it
describes the sensitivity of stock returns to unanticipated changes in exchange rates.
An appreciation of the US dollar makes exporting goods more expensive in terms of
the foreign (Asian) currencies, and this may lead to a fall in foreign demand and foreign
sales revenue. On the other hand, the importing firm will benefit from an appreciation
of the US dollar, as its imports become cheaper in terms of the US dollar. Thus, the i
coefficient should be positive for net-importers and negative for net-exporters[20].
Furthermore, changes in exchange rates alter the US dollar value of Asiandenominated fixed assets and liabilities; US multinational firms with net exposed
Asian denominated liabilities will gain with a strengthening US dollar, while firms
with net exposed Asian denominated assets lose.
Exchange risk
exposure of US
multinationals
719
MF
33,9
720
One of the most important features of financial weekly time series is the presence of
heteroskedasticity. Indeed, the hypothesis of constant variance, we implicitly make in
the above-mentioned model (Equation (2)), is in most cases rejected for common
financial weekly time series like exchange rate and stock returns series[21]. As the
presence of heteroskedasticity invalidates the test statistics, we suggest adding a
GARCH(1, 1) specification to the basic regression model each time we detect
heteroskedasticity in the firm-level stock return series. The choice of a GARCH(1, 1)
specification is supported by many empirical studies showing that the GARCH(1, 1)
specification is valuable for modeling the variance generating process of financial time
series. Thus, the regression model we use in these cases can be described as:
Rit i i Rmt i Xt "it
hi;t i
"2i;t1
vhi;t1
"i;t i;t hi;t 2
3
4
where hi,t denotes the conditional variance of the residuals and i,t the white noise error
term.
Considering each exchange rate regime shift separately, we estimate the augmented
market model firm by firm; first, over the pre-crisis window the estimated coefficients
are labeled 1, 1 and 1, respectively and, secondly, over the post-crisis window
the estimated coefficients are labeled 2, 2 and 2, respectively. The results displayed
in Table V enable us hence to verify whether the above documented increase of total
stock return variability causes additional systematic risk for our sample companies
and whether the sensitivity of US stock returns to fluctuations in Asian currencies
increased in the aftermath of a crisis[22].
Table V shows the evolution of cross-sectional mean, median, first and third quartile
values of the ordinary least squares estimators of the 1 and 2 coefficients for the two
sub-sample periods. The summary statistics of the 1 coefficients reveal that for most
samples the mean market risk of the test sample companies was lower than the mean
market risk of the corresponding control sample firms before the crisis. This finding
tends to support the argument that test sample firms benefited from greater
geographic diversification advantages than non-Asia oriented US multinational
firms before the currency crisis exploded. This deduction, however, should been taken
carefully as the control samples include not only US domestic firms but also US
multinational firms that are not active in the crisis countries and could, hence, profit
from the diversification impact of other foreign activities.
Furthermore, the evidence indicates that 2 coefficients tend to be systematically
larger than 1 coefficients across test samples while they remain unchanged or lower
across control samples. The comparison of the relative changes in market risk across
test and control samples suggests moreover that the sensitivity of US multinationals to
stock market risk increased significantly more for test firms than for control firms. The
mean and median values of these relative changes suggest, indeed, that the market risk
of US multinationals with real operations in the Asian crisis economies increased
significantly by approximately 20-25 per cent while it decreased by 10-20 per cent for
control firms. The test sample that seems most affected by the currency crisis regroups
US multinational firms that were active in Indonesia. Their market beta increased from
a cross-sectional mean value of 0.9722 during the fixed exchange rate period to 1.0457
during the floating exchange rate period. This outcome may be attributable to the fact
that, relative to other Asian markets, Indonesia experienced the most volatile currency
movements after its currency crisis (see Figure 1).
88
Control sample (SD)
Test sample (SD)
Market risk
1.1097
0.0739
1.3105
0.0425
97
360
Mean
Control sample (SD)
324
0.3723
0.1990
0.0379
0.0451
Currency risk exposure
Test sample (SD)
Mean
324
1.0758
0.0686
1.1899
0.0393
Mean
Control sample (SD)

Test sample (SD)
88
Market risk
0.4478
0.0424
1.0423
0.9380
0.7431
0.6086
Before crisis: 1
Median
Q1
1.1633
1.6790
1.4320
Q3
0.3310
0.4871
Q3
Before crisis: 1
Q1
0.0456
Median
1.3626
1.5241
0.6426
Q3
0.6893
0.9689
0.9864
Before crisis: 1
Median
Q1
1.1936
0.0595
1.1733
0.0327
Mean
17
19.32%
41
12.65%
n*
1.0912
0.0560
1.0071
0.0289
Mean
1.0702
1.1148
0.0576
0.7224
0.7315
1.2866
1.4501
Q3
Mean
Median
Mean
Median
1.4787
1.5511
Q3
0.1413
0.1353
Mean
Median
Mean
Median
0.0373
0.0275
After crisis: 2
Q1
Q3
0.0611
Median
0.6377
0.7157
After crisis: 2
Median
Q1
0.0351
0.0190
0.0573
0.0087
Mean
0.9439
1.0402
After crisis: 2
Median
Q1
0.0026a
0.0005b
1.287
1.188
0.911
0.792
(Continued)
sign.
0.0000a
0.0006b
1/2
35
39.77%
50
15.43%
n*
1.200
1.011
0.946
0.873
Relative change
1/2
sign.
Exchange risk
exposure of US
multinationals
721
Changes in risk across

exchange rate regimes
Cross-sectional
distribution of firm-level
changes in market risk
and exchange risk
exposure
Table V.
97
360
Test sample (SD)
Control sample (SD)
Market risk
71
256
Test sample (SD)
Control sample (SD)
116
420
Market risk
Test sample (SD)
Control sample (SD)
256
Control sample (SD)
1.0811
0.0578
1.3312
0.0335
Mean
0.2965
0.2391
0.0260
0.0439
Mean
0.9722
0.0622
1.1657
0.0369
Mean
0.3000
0.4159
0.3831
0.1091
Mean
1.3356
0.3834
0.7469
0.3714
1.1576
0.9974
0.8063
0.7588
Before crisis: 1
Median
Q1
0.0172
1.7266
1.5961
Q3
Q3
Before crisis: 1
Q1
0.4589
Median
1.2106
1.5029
0.6124
0.7519
0.9839
0.8317
Q3
1.2710
0.6685
Before crisis: 1
Median
Q1
0.2921
0.8412
Q3
1.2484
Before crisis: 1
Q1
0.0118
Median
1.0822
0.0532
1.1758
0.0295
Mean
14
19.72%
29
11.33%
n*
1.0457
0.0591
1.0725
0.0303
Mean
16
16.49%
56
15.56%
n*
Median
1.0576
1.0385
0.7112
0.7217
1.3400
1.4128
Mean
Median
Mean
Median
0.0641
0.0334
1.5563
1.5538
Q3
0.0448
0.0510
Mean
Median
Mean
Median
0.0243
0.0097
After crisis: 2
Q1
Q3
0.0100
0.0007
Median
0.7088
0.6507
After crisis: 2
Median
Q1
0.0069
0.0076
0.0088
0.0036
Mean
0.9687
0.9428
Q3
0.1285
0.2540
After crisis: 2
Q1
Q3
0.1000
0.0065
0.0334
0.0305
0.0315
0.0103
After crisis: 2
Median
Q1
Mean
722

Test sample (SD)
71
Table V.
1.040
0.953
0.931
0.865
1/ 2
24
33.80%
23
8.98%
n*
1.206
1.043
0.974
0.925
1/ 2
49
50.52%
44
12.22%
n*
(Continued)
0.0000a
0.0001b
sign.
0.0000a
0.0104b
sign.
MF
33,9
116
420
Test sample (SD)
Control sample (SD)
0.0891
0.0075
0.2005
0.0890
0.0865
0.0242
0.1021
0.3576
0.1497
Q3
0.3526
Before crisis: 1
Q1
Median
Mean
25
21.55%
56
13.33%
n*
0.0776
0.0209
0.0450
0.0054
Mean
0.0427
0.0720
Median
0.0232
0.0595
0.1092
0.1769
After crisis: 2
Q1
Q3
62
53.45%
49
11.67%
n*
"i;t i;t hi;t 2
hi;t i "2i;t1 hi;t1
where hi,t denotes the conditional variance of the residuals, i,t the white noise error term. The and coefficients are the cross-sectional Mean, Median, first and
third quartile of the parameter estimates for the individual firms in each sample. The reported standard errors are the cross-sectional standard errors of the means.
n* reports the number of firms with a significant positive or negative exchange risk exposure coefficient among the sample while percentages are reported in
italics. The mean and median 1/2 values describe the distributions of the relative changes in market risk exposures from the pre-crisis period to the post-crisis
period. The reported significance levels are for the rejection of a t-test (a) on the difference in means between the distributions of the test and control sample ratios
and of a Wilcoxon rank-sum (b) test on the shift in median values between the distributions
The sample periods are, respectively: for Thailand from 5 July 1995 till 25 June 1997 (before the regime shift) and from 2 July 1997 till 30 June 1999 (after the
regime shift); for Malaysia from 19 July 1995 till 9 July 1997 (before the regime shift of 1997) and from 16 July 1997 till 26 August 1998 (after the regime shift of
1997 and before Malaysia returned to a conventional peg arrangement in September 1998); for Indonesia from 22 November 1995 till 6 August 1997 (before the
regime shift) and from 13 August 1997 till 28 July 1999 (after the regime shift); and for Korea from 6 December 1995 till 12 November 1997 (before the regime
shift) and from 19 November 1997 till 1 December 1999 (after the regime shift)
Rit i i Rmt i Xt "i;t
where Rit the total return of firm i in week t, Rmt designates the overall US stock market return in week t and Xt is the log price change of, respectively, the Thai
baht, the Malaysian ringgit, the Indonesian rupiah and the Korean won per US dollar in week t and "i,t denotes the white noise error term
The following model extension is used when the total stock returns of firm i are heteroskedastic:
Notes: The table reports summary statistics for i and i across different industry classes from the estimation of the following regression model over,
consecutively, the pre-crisis windows and the post-crisis windows:
Exchange risk
exposure of US
multinationals
723
Table V.
MF
33,9
724
The empirical results in Table V show moreover the evolution of the Asian foreign
exchange risk exposures of US multinationals. We find that US multinationals with real
operations in Asia were significantly more vulnerable to fluctuations in Asian exchange
rates after the exchange rate regime shift from fixed to floating exchange rates. While
only 72 test sample firms experienced economically significant exposure effects to the
Asian currencies during the fixed exchange rate period, 170 firms experienced exposure
effects during the floating exchange rate period[23]. It seems likely that the increased
exchange rate variability faced by US multinationals had led to a higher percentage of
firms with significant exchange risk exposure. This finding tends to support the view
that the foreign exchange risk exposure effect is time-variant (Bartov and Bodnar, 1994).
Hence, these findings also suggest that US multinationals did not increase their hedging
activities when the volatility of the Asian currencies was highest[24].
Overall, the results are consistent with our expectations and corroborate the findings
of Bartov et al. (1996) and Chen and So (2002)[25]. Following the sharp increase in
exchange rates variability due to the currency crisis, the stock market risk of US
multinationals active in these emerging economies increased significantly. While all of
the firms experienced an increase in stock return volatility following the exchange rate
regime shifts, there is a significant difference in the nature of this increased volatility
across the different samples of firms. The increased exchange rate variability increases
the US multinationals systematic risk with respect to the US equity market portfolio. In
addition, the negative change in market risk experienced by many control firms during
the post-crisis period moreover suggests that the relative shift in market risk between
sample and control firms is even larger than reported by the 2 coefficients for sample
firms. Thus, US multinational firms saw their beta rising as a result of the Asian
financial turmoil and, correspondingly, are faced with higher equity financing costs. The
evidence moreover suggests time-variation in exposure at the individual firm level.
6. Sensitivity analysis
6.1 Across industries
Different industries present different types of import and export patterns as well as
different competitive environments for their firms. The impact of an increase in
exchange rate uncertainty may therefore affect some industries differently than others.
If, for example, a sharp depreciation in the crisis country increases the competitiveness
of its exports, this has a negative impact on firms competing with those exports
whereas it may have a positive influence on foreign firms using those exports as inputs
in their production process. In order to specifically identify which types of industries
are most affected by the crises that originate elsewhere, this paper uses an industrylevel variation for the firm-by-firm analysis.
In order to perform this industry-level analysis, both test and control samples are
sub-divided in eight different industry sectors. Results shown in Table VI reveal that
US multinational firms within the Wholesale and Retail Trade, the Finance, Insurance
and Real Estate as well as the Services industries experienced a sharp increase in
systematic risk with respect to the US equity market portfolio during the period of
increased exchange rate variability. It is quite comprehensive that these sectors were
hardest hit by the Asian financial turmoil. These sectors consist mainly of US firms
that export finished goods and services towards Asian markets. As such they
suffered both from their relative loss in competitiveness compared to Asian firms and
from the decrease in the Asian demand due to the income effect. As suggested in
Table VI, US multinationals in the Agriculture, Mining and Construction industries
8
11
Wholesale and retail trade
Finance, insurance and real estate
20
40
116
24
Basic manufacturing
Chemicals, plastics and petroleum related
Manufacturing (metals related)
Transportation, com. and utilities
Control sample
Agriculture, mining and const.
31
15
11
Services
Basic manufacturing

Test sample
0.8941
0.2777
0.7529
0.0826
0.7504
0.0564
1.4352
0.0771
1.0056
0.0799
0.4261
0.7929
0.3280
0.7973
0.0969
1.3000
0.1266
1.1148
0.4552
0.8062
0.3489
0.9578
0.1372
1.1671
0.1703
Mean
1
0.9862
1.1808
0.6925
0.6518
0.9534
1.0866
0.9353
0.4549
0.8029
1.1121
0.8810
0.6665
Median
0.5725
0.6411
0.1554
0.0918
0.1941
0.0675
0.1550
0.0820
0.1875
0.1817
0.0483
0.0784
0.4990
0.7712
0.4577
0.5084
0.2997
0.3913
0.6313
0.3464
0.3790
0.3964
0.7784
0.9006
0.6668
Mean
Before crisis
0.1729
0.1122
0.1446
0.2485
0.3803
0.0519
0.1746
0.1653
0.0560
0.0444
0.6640
0.4361
1
Median
1
33.33%
1
5.00%
6
15.00%
12
10.34%
5
20.83%
0
0.00%
0
0.00%
3
27.27%
4
12.90%
1
16.67%
1
12.50%
2
18.18%
6
40.00%
Sign.
0.8669
0.4476
0.7147
0.0993
0.8080
0.0762
1.1461
0.0503
0.9336
0.1042
0.4729
0.7563
0.1305
0.9045
0.1683
1.1951
0.0792
0.9791
0.2820
0.9306
0.2793
1.0655
0.2001
1.3162
0.1261
Mean
2
0.9055
1.0927
0.6996
0.5900
0.6038
1.2107
0.8985
0.9775
1.1599
1.1573
0.8725
0.8453
Median
0.0028
0.1211
0.0536
0.0192
0.0741
0.0179
0.0499
0.0157
0.0772
0.0279
0.0606
0.0014
0.0675
0.0130
0.0394
0.0865
0.0299
0.1478
0.0751
0.1360
0.1182
0.1582
0.0342
0.0700
0.0516
Mean
After crisis
0.0614
0.0571
0.0891
0.0521
0.0039
0.0103
0.1233
0.0987
0.1050
0.1109
0.0027
0.0053
2
Median
(Continued)
1
33.33%
1
5.00%
7
17.50%
24
20.69%
1
4.17%
0
0.00%
0
0.00%
9
81.82%
8
25.81%
3
50.00%
2
25.00%
3
27.27%
10
66.67%
Sign.
Exchange risk
exposure of US
multinationals
725

Analysis of crosssectional distribution of
firm-level changes in
market risk and
exchange risk exposure
across industries
Table VI.
4
5
15
41
6
1
9
16
12
19
Basic manufacturing
Services
Control sample
Basic manufacturing
48

Test sample
Services
39
Table VI.
34
0.9804
0.0918
0.8305
0.0871
1.2640
0.1473
0.6880
0.1312
0.6199
0.0775
1.2461
0.1121
1.1882
0.2784
1.2879
1.0664
0.0884
1.2964
0.2528
1.1079
0.1187
0.9395
0.0854
1.5174
0.0920
Mean
0.7330
0.9807
1.0101
1.0193
1.2573
1.1442
0.5932
0.6379
1.2509
1.4946
0.8098
0.8815
Median
1.1459
0.4778
0.2585
0.2615
0.5247
0.6176
0.5613
0.7197
0.0945
0.5102
0.9677
0.8029
0.4723
0.4017
0.8264
0.6893
0.6044
0.0028
0.7232
0.3404
0.1525
0.0080
0.0730
0.0354
0.1529
Mean
Before crisis
0.4030
1.3459
0.1540
0.6794
-0.3314
0.0619
0.0333
0.5148
0.6106
0.0723
0.0380
0.3645
1
Median
1
8.33%
2
10.53%
0
0.00%
2
40.00%
1
6.67%
9
21.95%
0
0.00%
0
0.00%
2
22.22%
2
12.50%
5
14.71%
3
7.69%
8
16.67%
Sign.
1.2622
0.2168
0.8497
0.0912
1.6171
0.5478
0.6946
0.0916
0.7176
0.0858
1.2858
0.0861
1.0946
0.2059
1.4009
1.2297
0.2044
1.4572
0.1164
0.8320
0.0763
0.9629
0.0747
1.1644
0.0740
Mean
2
0.8534
1.2743
1.1618
1.0449
1.1411
1.2430
0.6800
0.5845
1.8794
1.0912
0.9721
0.7828
Median
0.1073
0.0642
0.0006
0.0214
0.1047
0.1134
0.0095
0.0799
0.0995
0.0668
0.0365
0.0494
0.2605
0.1365
0.4060
0.2808
0.0610
0.2140
0.1228
0.0541
0.0201
0.1086
0.0211
0.0164
0.0312
Mean
After crisis
726
1
0.1169
0.0193
0.0591
0.3255
0.2165
0.0088
0.0040
0.0070
0.1068
0.0219
0.1081
0.0416
2
Median
(Continued)
0
0.00%
2
10.53%
0
0.00%
3
60.00%
7
46.67%
20
48.78%
4
66.67%
1
100.0%
5
55.56%
9
56.25%
2
5.88%
7
17.95%
7
14.58%
Sign.
MF
33,9
56
147
23
3
37
63
2
1
18
20
8
7
8
Services

Test sample
Basic manufacturing
Finance, Insurance and real estate
0.6962
0.0119
0.4799
0.8299
0.0665
1.1879
0.1457
0.9916
0.2280
0.7423
0.2042
1.1060
0.1960
0.8460
0.0658
1.5262
0.0700
1.1660
0.1340
1.0743
0.1245
0.8324
0.0438
1.7727
0.1178
Mean
1
0.9421
0.6070
0.8309
1.0829
0.8020
0.6962
1.5496
0.8469
1.0411
0.9922
1.3670
0.7010
Median
0.5514
0.3825
3.3989
0.0387
0.3660
1.1861
0.4515
1.4613
0.8689
0.6835
0.7905
0.6644
0.4732
0.1142
0.2127
0.6511
0.1772
0.8165
0.3457
0.2985
0.8717
0.4480
0.1152
0.1330
0.3776
Mean
Before crisis
0.4166
1.1021
1.3174
1.1152
0.4216
0.5514
0.0746
0.4212
0.3618
0.8890
0.4233
0.1366
1
Median
0
0.00%
0
0.00%
3
16.67%
5
25.00%
2
25.00%
0
0.00%
2
25.00%
7
12.50%
26
17.69%
6
26.09%
0
0.00%
7
18.92%
7
11.11%
Sign.
1.0667
0.5774
0.4700
0.9017
0.1115
1.1523
0.0845
1.0028
0.1820
0.9851
0.4959
1.2558
0.2079
0.9208
0.0640
1.3225
0.0514
1.1688
0.1999
0.9858
0.1695
0.9244
0.0584
1.2886
0.0707
Mean
2
1.4191
0.6146
0.9517
1.0897
0.8727
1.0667
1.1739
0.9132
0.9572
1.0463
1.2466
0.8376
Median
0.0024
0.1604
0.0115
0.0020
0.0151
0.0245
0.0114
0.0058
0.0345
0.0463
0.0387
0.0470
0.0204
0.0516
0.0195
0.0175
0.0161
0.0054
0.0462
0.0146
0.0364
0.0559
0.0251
0.0366
0.0332
Mean
After crisis
0.0508
0.0072
0.0444
0.0226
0.0052
0.0024
0.0132
0.0325
0.0385
0.0557
0.0199
0.0203
2
Median
(Continued)
1
50.00%
0
0.00%
5
27.78%
8
40.00%
1
12.50%
3
42.86%
3
37.50%
8
14.29%
15
10.20%
1
4.35%
0
0.00%
11
29.73%
7
11.11%
Sign.
Exchange risk
exposure of US
multinationals
727
Table VI.
8
4
67
61
31
25
31
29
0
6
17
Control sample
Basic manufacturing
Services

Test sample
Basic manufacturing
Table VI.
7
0.5840
0.0954
0.7103
0.0776
0.6737
0.0950
0.6245
0.0942
1.0265
0.0580
1.3311
0.0686
1.0464
0.1099
1.2408
0.2164
0.9731
0.0737
1.6200
0.1176
0.9259
0.1936
Mean
0.7881
0.6712
1.5473
0.8980
0.9327
0.9148
0.8757
1.1365
0.6118
0.6868
1.1044
Median
0.0431
0.0499
0.1879
0.1467
0.0366
0.1712
0.1930
0.3204
0.0416
0.0748
0.0020
0.1051
0.2146
0.1223
0.1835
0.1772
0.0698
0.0702
0.0464
0.1654
0.5812
0.9991
Mean
Before crisis
0.0156
0.0229
0.0375
0.1805
0.2133
0.2748
0.0158
0.0900
0.0647
0.0941
0.4109
1
Median
2
33.33%
4
23.53%
1
12.50%
0
0.00%
10
14.93%
6
9.84%
3
9.68%
1
4.00%
4
12.90%
4
13.79%
2
28.57%
Sign.
0.5340
0.1281
0.7990
0.0967
0.7873
0.1797
0.5722
0.0303
1.0273
0.0628
1.2459
0.0621
0.9474
0.0815
1.0169
0.1380
0.9090
0.0574
1.3165
0.0733
1.0564
0.1576
Mean
2
0.6975
0.5847
1.3625
0.8616
0.9002
0.8802
1.1217
0.8998
0.4753
0.7043
0.9428
Median
0.0123
0.0974
0.0770
0.0654
0.0344
0.0171
0.0192
0.188
0.0106
0.0063
0.0102
0.0083
0.0015
0.0123
0.0133
0.0116
0.0275
0.0071
0.0047
0.0134
0.0065
0.0082
Mean
After crisis
728
Services
1
(Continued)
3
50.00%
11
64.71%
0.0272
0.0798
0
0.00%
1
25.00%
4
5.97%
8
13.11%
3
9.68%
1
4.00%
4
12.90%
2
6.90%
3
42.86%
Sign.
0.0141
0.0244
0.0115
0.0123
0.0025
0.0127
0.0107
0.0382
0.0026
2
Median
MF
33,9
45
7
8
17
16
0
23
59
164
29
27
Services
Control sample
Basic manufacturing
0.9047
0.0976
1.0356
0.0610
1.5055
0.0581
1.2199
0.0795
1.2116
0.1008
1.3626
0.0964
1.1513
0.2693
0.7735
0.2221
0.9084
0.0885
1.1765
0.1858
Mean
1
1.0931
1.1999
1.3609
0.9345
0.8246
1.1343
0.8077
0.7615
1.1976
1.3448
Median
0.2056
0.0820
0.0590
0.0449
0.0057
0.0413
0.1409
0.1312
0.1860
0.0883
0.3648
0.1847
0.0336
0.3820
0.1434
0.1281
0.1342
0.1426
0.0568
0.2043
Mean
Before crisis
0.2261
0.0852
0.0006
0.1308
0.1219
0.0536
0.0075
0.0307
0.0047
0.0438
1
Median
4
17.39%
9
15.25%
16
9.76%
10
34.48%
4
14.81%
11
24.44%
2
28.57%
1
12.50%
2
11.76%
3
18.75%
Sign.
0.7174
0.0694
0.8657
0.0573
1.3647
0.0516
1.0611
0.1166
1.0791
0.1248
1.2668
0.0829
1.1438
0.1941
0.8195
0.2427
1.0095
0.1122
1.2505
0.1713
Mean
2
0.8446
0.9325
1.1940
0.7298
0.6695
1.3526
1.0849
0.7543
1.1716
1.2928
Median
0.0156
0.175
0.0464
0.0132
0.0486
0.0092
0.0069
0.0240
0.0471
0.0164
0.1088
0.0286
0.0399
0.0493
0.1445
0.0363
0.0888
0.0315
0.0135
0.1072
Mean
After crisis
0.0546
0.0118
0.0434
(Continued)
3
13.04%
7
11.86%
19
11.59%
4
13.79%
4
14.81%
0.0270
0.0382
27
60.00%
1
14.29%
1
12.50%
11
64.71%
8
50.00%
Sign.
0.0154
0.1238
0.1604
0.0030
0.0595
2
Median
Exchange risk
exposure of US
multinationals
729
Table VI.
0.9862
0.0608
1.7136
0.0882
1.5937
0.8784
Median
0.1617
0.0446
0.1742
0.0663
Mean
0.1686
0.0971
1
Median
4
7.27%
9
14.29%
Sign.
0.9877
0.0503
1.4001
0.0611
Mean
2
1.3647
1.0226
Median
0.0622
0.0107
0.0485
0.0150
Mean
After crisis
0.0451
0.0674
2
Median
4
7.27%
8
12.70%
Sign.
hi;t1
"i;t i;t hi;t 1=2
where hi,t denotes the conditional variance of the residuals, i,t the white noise error term. The and coefficients are the cross-sectional mean and
median estimates of the parameter estimate for the individual firms in each sample. The reported standard errors are the cross-sectional standard errors
of the means. The significances report the number of firms with a significant positive or negative exchange risk exposure coefficient among the subsamples while percentages are reported in italics
Definition of industry sectors: Agriculture, Mining and construction SIC 0-1299 and 1400-1999; Basic manufacturing SIC 2000-2799 and 3100-3299;
Chemicals, plastics and petroleum related industries SIC 1300-1399 and 2800-3099; Manufacturing (metals related industries) SIC 3300-3999;
Transportation, Communication and Utilities SIC 4000-4999; Wholesale and Retail Trade SIC 5000-5999; Finance, Insurance and Real Estate SIC 60006999; Services SIC 7000-8999
hi;t i
"2i;t1
where Rit the total return of firm i in week t, Rmt designates the overall US stock market return in week t and Xt is the log price change of, respectively,
the Thai baht, the Malaysian ringgit, the Indonesian rupiah and the Korean won per US dollar in week t and "i,t denotes the white noise error term
63
Services
Table VI.
55
Mean
Before crisis
730
1
MF
33,9
were similarly affected by the Asian crisis[26]. These findings confirm the huge
negative impact the Asian crisis had on the US Agricultural industry[27].
On the other hand, among control sub-samples, we observe that firms within
the Agriculture, Mining and Construction sectors also saw their market risk exposure
rise after the currency crises[28]. Similarly if we focus on the control sample firms that
have been selected to match the test companies that were active in the Finance,
Insurance and Real Estate sectors in Thailand, Malaysia and Korea during the crisis,
we observe that on average their market risk increased as well in the aftermath of these
crises. However, for both sector groups, the growth rates in market risks are generally
weaker for control sample firms than for test sample firms. They nevertheless suggest
that either the arrival of floating exchange rates affected these entire industry sectors
through the changes in the environmental competitiveness of both domestic and
multinational firms, or that these sectors experienced at the same time structural
changes that were independent of the crisis.
The relative low impact on other industries may be explained by the fact that US
manufacturing industries were affected in various different and opposite ways during
periods of increased exchange rate variability. To the extent that the Asian demand fell
for manufacturing goods, US exports to the region were negatively affected. On the
other hand, the depreciation of Asian currencies relative to the US dollar allowed Asia
to expand its position in the manufacturing industries both increasing its demand for
intermediate manufacturing components from the US and decreasing the relative price
of intermediate manufacturing goods for US importers. As a result, the overall impact
of the increased exchange rate uncertainty on US manufacturers active in the Asian
region was expected to be reduced. Furthermore, we find that the significance of the
exchange risk exposure of US multinational firms with real operations in Asia
increased across all industries. Correspondingly, when analyzing the Thai, Malaysian
and Indonesian crises, we observe that control sample firms within the Finance,
Insurance and Real Estate sectors saw their sensitivity to exchange rate fluctuations
also rising as a result of the increased exchange rate variability.
6.2. Across size
In order to perform an analysis of the characteristics of US multinationals exposed to
foreign exchange rate risk, we furthermore examine the impact of increased exchange
rate variability on market risk (beta) of US multinationals across different market
capitalization categories. Therefore, we group both test sample firms and control
sample firms within five separate classes according to their market value and examine
the change in market risk across these various sub-samples at the individual firm level.
Our findings displayed in Table VII reveal two notable facts. First, the increase in
market beta for US multinationals active in the Asian markets was particularly strong
for very small firms whose market capitalization was lower than $1 million at the event
date[29]. Second, we observe consistently that among the test samples the small
capitalization firms experience an increase in the percentage of significant exchange
risk exposure effects during the second sub-period when the exchange rates of Asian
currencies were unusually volatile. The number of significant exposure coefficients
increases from 19 in the first sub-sample period to 63 in the second sub-period.
7. Concluding remarks
This paper analyses whether there is any relationship between fluctuation in Asian
exchange rates and stock return volatility of US multinationals, whether increased
Exchange risk
exposure of US
multinationals
731
Table VII.
Analysis of crosssectional distribution of
firm-level changes in
market risk and
exchange risk exposure
across market
capitalization categories
11
16
12
89
95
36
58
19
5,000 < m.c. < 10,000
10,000 < m.c. < 50,000
m.c. > 50,000
Control sample
m.c. < 1,000
1,000 < m.c. < 5,000
5,000 < m.c. < 10,000
10,000 < m.c. < 50,000
m.c. > 50,000
27
12
1,000 < m.c. < 5,000
5,000 < m.c. < 10,000

Test sample
m.c. < 1,000
30
26
1,000 < m.c. < 5,000

Test sample
m.c. < 1,000
23
1.0247
0.1445
1.3581
0.1733
0.9331
0.1072
0.1928
1.2958
0.0808
1.3612
0.0683
1.0074
0.1043
0.8630
0.0469
0.7694
0.0826
1.0295
0.1625
1.1662
0.1245
1.0072
0.2027
1.1386
0.1338
0.9481
Mean
0.8305
1.1833
0.8088
0.7407
0.8076
0.8105
1.1713
1.0508
0.9192
1.0473
0.8498
1.0082
0.8739
Median
1.2308
1.2932
0.2936
0.2285
0.4127
0.4897
0.4616
0.0580
0.1063
0.0104
0.0747
0.0764
0.0876
0.0658
0.0753
0.0072
0.1475
0.0703
0.5160
0.7319
0.3114
0.9478
0.6729
0.2547
0.3406
0.1988
Mean
Before crisis
0.0077
0.1453
0.5960
0.1315
0.0715
0.0434
0.0469
0.0935
0.3292
0.0031
0.3002
0.0264
0.0784
1
Median
1
3.33%
3
11.11%
3
25.00%
25.00%
9
10.11%
17
17.89%
4
11.11%
8
13.79%
3
15.79%
3
13.04%
4
15.38%
2
18.18%
4
25.00%
3
Sign.
1.0814
0.1117
1.3409
0.1172
0.9555
0.1386
0.1574
1.1660
0.0569
1.1237
0.0450
0.8347
0.0845
0.7318
0.0479
0.7545
0.0800
1.1262
0.1257
1.1209
0.1091
1.0605
0.1353
1.2108
0.1261
1.1966
Mean
2
0.8324
1.3958
0.9626
0.7373
0.7091
0.8398
1.0301
1.1783
1.1993
1.1097
1.1016
0.9599
0.9554
Median
0.1446
0.0915
0.0478
0.0420
0.1759
0.0573
0.0326
0.0098
0.0161
0.0627
0.0157
0.0459
0.0245
0.1089
0.0147
0.1008
0.0210
0.0137
0.0436
0.0136
0.0342
0.0824
0.0371
0.0435
0.0534
0.1209
Mean
After crisis
732
1
0.1429
0.0075
0.0052
0.0861
0.1100
0.0449
0.0637
0.0007
0.1055
0.1206
0.0617
0.0191
0.0060
2
Median
(Continued)
19
63.33%
12
44.44%
4
33.33%
41.67%
9
10.11%
24
25.26%
3
8.33%
11
18.97%
3
15.79%
13
56.52%
9
34.62%
3
27.27%
5
31.25%
5
Sign.
MF
33,9
119
101
39
70
31
m.c. > 50,000
Control sample
m.c. < 1,000
1,000 < m.c. < 5,000
5,000 < m.c. < 10,000
10,000 < m.c. < 50,000
m.c. > 50,000
23
7
13
11
1,000 < m.c. < 5,000
5,000 < m.c. < 10,000
10,000 < m.c. < 50,000
m.c > 50,000

Test sample
m.c. < 1,000
17
19
10,000 < m.c. < 50,000
0.8861
0.1159
0.9408
0.0978
1.2278
0.3273
1.0549
0.1775
0.9104
0.1326
1.4647
0.0811
1.3880
0.0846
1.3180
0.1292
1.1671
0.0769
0.7807
0.0646
1.0539
0.1421
1.0016
0.1793
Mean
1
0.8281
0.8868
0.8521
0.9350
0.7243
0.6820
0.9997
1.0411
1.1186
1.2450
0.9380
0.8778
Median
0.7289
0.6373
0.4970
0.3651
0.3811
0.4982
1.3685
0.5684
0.1411
0.4694
0.1108
0.2039
0.4885
0.2191
0.6221
0.4197
0.5431
0.1964
0.4225
0.1573
0.8618
0.4218
0.4815
0.3539
Mean
Before crisis
0.3743
0.8824
0.7612
0.4326
0.4109
0.3143
0.5379
0.3623
0.2096
0.1441
0.7933
1.2530
1
Median
4
23.53%
5
21.74%
1
14.29%
3
23.08%
1
9.09%
18
15.13%
15
14.85%
7
17.95%
9
12.86%
7
22.58%
8
42.11%
1
11.11%
Sign.
1.1350
0.1153
1.0750
0.1219
1.0296
0.1549
1.0278
0.1202
0.8778
0.1760
1.3225
0.1317
1.2568
0.0565
1.2064
0.0948
1.0016
0.0603
0.7675
0.0624
1.2456
0.1275
1.3333
0.2310
Mean
2
0.6146
1.2291
1.0143
0.8103
0.9754
0.6519
0.9189
1.1146
1.1777
1.1449
1.5121
1.0449
Median
0.0101
0.0204
0.0001
0.0147
0.0171
0.0264
0.0304
0.0129
0.0134
0.0104
0.0160
0.0205
0.0210
0.0209
0.0319
0.0277
0.0305
0.0171
0.1145
0.0271
0.0011
0.0492
0.2162
0.0718
Mean
After crisis
0.0015
0.0422
0.0000
0.0007
(Continued)
9
52.94%
8
34.78%
2
28.57%
3
23.08%
2
18.18%
0.0039
0.0622
0.0233
0.0445
0.0079
19
15.97%
12
11.88%
2
5.13%
5
7.14%
6
19.35%
9
47.37%
5
55.56%
Sign.
0.0305
0.2687
0.0163
2
Median
Exchange risk
exposure of US
multinationals
733
Table VII.
23
59
34
5,000 < m.c < 10,000
10,000 < m.c < 50,000
m.c > 50,000
39
13
20
10
34
155
40
1,000 < m.c < 5,000
5,000 < m.c < 50,000
10,000 < m.c < 50,000
m.c < 50,000
Control sample
m.c > 1,000
1,000 < m.c < 5,000
5,000 < m.c < 10,000

Test sample
m.c < 1,000
34
80
1,000 < m.c < 5,000
Table VII.
60
1.5885
0.0683
1.3206
0.0535
1.2819
0.0831
1.3986
0.1364
1.1768
0.0861
1.2118
0.1886
0.9039
0.0895
0.9723
0.1473
1.2871
0.0912
1.2053
0.0680
1.3496
0.1595
1.0778
0.0548
0.8864
0.0558
Mean
1.1958
1.1379
1.4785
0.8289
0.9124
0.9026
1.0065
1.1524
0.8673
0.9410
1.0692
1.0959
1.0796
Median
0.0348
0.0502
0.0866
0.0412
0.0858
0.0689
0.3880
0.2508
0.0175
0.1136
0.1305
0.1907
0.2339
0.1426
0.3012
0.1731
0.0075
0.1331
0.0735
0.0632
0.0427
0.1499
0.1026
0.0755
0.1396
0.0796
Mean
Before crisis
0.0275
0.0678
0.0547
0.2269
0.0136
0.0889
0.0251
0.0441
0.1906
0.1573
0.2514
0.0861
0.0755
1
Median
17
12.69%
21
13.55%
3
7.50%
11
32.35%
10
25.64%
1
7.69%
1
5.00%
2
20.00%
12
20.00%
8
10.00%
2
8.70%
4
6.78%
5
14.71%
Sign.
1.4020
0.0614
1.1403
0.0435
1.2055
0.0819
1.4799
0.1179
1.1009
0.0785
1.1884
0.1437
0.9469
0.0966
1.0137
0.1699
1.1039
0.0613
1.1632
0.0651
1.1749
0.1199
1.0056
0.0457
0.8506
0.0558
Mean
2
1.1225
1.0303
1.3265
0.8359
0.9928
1.1317
0.9572
1.5463
0.7566
0.9391
0.9589
0.9892
1.0881
Median
0.0412
0.0117
0.0465
0.0080
0.0633
0.0177
0.0536
0.0511
0.0939
0.0335
0.1084
0.0587
0.0744
0.0397
0.0620
0.0514
0.0058
0.0086
0.0110
0.0069
0.0106
0.0143
0.0149
0.0058
0.0177
0.0084
Mean
After crisis
734
Control sample
m.c < 1,000
1
0.0637
0.0459
0.0329
0.1024
0.0736
0.1238
0.1035
0.0219
0.0198
0.0133
0.0085
0.0059
0.0042
2
Median
(Continued)
18
13.43%
17
10.97%
4
10.00%
22
64.71%
18
46.15%
7
53.85%
10
50.00%
5
50.00%
5
8.33%
6
7.50%
3
13.04%
5
8.47%
4
11.76%
Sign.
MF
33,9
30
m.c > 50,000
1.0455
0.0597
0.8832
0.0657
Mean
0.7927
0.9083
Median
0.1537
0.0464
0.1816
0.0500
Mean
Before crisis
0.1440
0.1280
1
Median
8
13.11%
7
23.33%
Sign.
0.9745
0.0571
0.7182
0.0624
Mean
2
0.6884
0.9068
Median
0.0511
0.0106
0.0171
0.0151
Mean
After crisis
0.0120
0.0511
2
Median
5
8.20%
5
16.67%
Sign.
"i;t i;t hi;t 1=2
where hi,t denotes the conditional variance of the residuals, i,t the white noise error term. The and coefficients are the cross-sectional Mean and Median
estimates of the parameter estimate for the individual firms in each sample. The reported standard errors are the cross-sectional standard errors of the Means. The
significances report the number of firms with a significant positive or negative exchange risk exposure coefficient among the sub-samples while percentages
are reported in italics. Market capitalization categories are expressed in thousands of US$
hi;t i "2i;t1 hi;t1
where Rit the total return of firm i in week t, Rmt designates the overall US stock market return in week t and Xt is the log price change of, respectively, the Thai
baht, the Malaysian ringgit, the Indonesian rupiah and the Korean won per US dollar in week t and "i,t denotes the white noise error term
61
10,000 < m.c < 50,000
1
Exchange risk
exposure of US
multinationals
735
Table VII.
MF
33,9
736
exchange rate variability contributes to their systematic risk with respect to the US
equity market portfolio, and whether the impact of increased exchange rate risk
displays any industry-specific or size-specific pattern. We find that the stock return
volatility of US multinationals increased significantly in the period of increased
exchange rate variability, even relative to the increase in stock return volatility of other
US companies belonging to the same industry sector and market capitalization
class that are not active in the Asian countries. Our findings support the economic
intuition that exchange rate fluctuations play an important role in the return
generating process of US multinationals. In conjunction with this increase in total
volatility, there is also an increase in market risk (beta) for US multinational firms with
real foreign operations in the crisis countries. Thus, US multinational firms saw their
beta rising as a result of the financial turmoil and, correspondingly, are faced with
higher equity financing costs.
Furthermore, the empirical evidence suggests that trade and services-oriented
industries are particularly sensitive to changing exchange rate conditions while
manufacturing companies appear to be less affected. We find moreover that small US
multinationals were strongly influenced by the Asian financial crisis.
The empirical evidence in this paper has several practical implications. From a
methodological view, our results suggest that this approach effectively rules out the
influence of the time-variation of foreign exchange rate exposure. In addition, the
observed increased stock return volatilities and the corresponding increase in market
risk have important implications for the decision-making process of international
investors, as well as for firms in financial operations. If the additional risk imparted to
exposed firms from increased exchange rate variability is systematic in nature, it will
affect the required rate of (equity) return (i.e. investors demand higher returns for
holding the firms shares). Consequently, this effect of exchange rate fluctuations
increases the cost of (equity) capital for US multinational firms with real foreign
operations in the affected crisis countries.
Notes
1.
2.
3.
4.
5.
6.
7.
8.
See Webber (2001) for a detailed chronology of the Asian currency crisis.
Radelet and Sachs (1998) were the earliest authors to make this argument.
This point of view is supported, for instance, by Corsetti et al. (2000), Glick and Rose (1999).
Financial contagion through trade link is theoretically analyzed in Gerlach and Smets
(1995). Empirically, Eichengreen et al. (1996), provide evidence that the closer the trade
relationship between two countries is, the more significant the currency crisis
transmission is. Analyzing the 1994-1995 Mexican and 1997 Asian crisis, Fratzser
(1998) found that the most important channels for crisis transmission were trade
relationship and the integration of financial sectors. Glick and Rose (1999) showed that
the contagion of the Asian crisis was related to the third-party trade linkage. Kaminsky
and Reinhart (2000) obtained similar results. Finally, Forbes (2004) also showed, with
firm-level data, that trade channels are essential factors determining how crises are
transmitted internationally.
The USA and Japan are the two most important importers of Thai, Malaysian,
Indonesian and Korean exports outside of Southeast Asia.
Note that more than 35 per cent of the Fortune Global 500 firms in 2000 were from the
USA, hence they are sufficiently representative of multinational firms around the globe.
Rahmatsyah et al. (2002) provide an extensive discussion of this literature.
For example, see Bartov et al. (1996), Chen and So (2002), Chang (2002), Bin et al. (2004).
9. Jorions (1990) study of US firms finds that only 5 per cent of his sample is significantly
affected by exchange rate movements. Amihud (1994) similarly reports no significant
contemporaneous exposure for the 32 largest US exporting firms. These results are
consistent with the findings of Bartov and Bodnar (1994) who observed insignificant
relationships between exchange rate changes and stock returns of 208 firms with
foreign operations.
10. He and Ng (1998) show, for example, that contemporaneous changes in exchange rates
are significant in explaining stock returns of Japanese firms while, according to Griffin
and Stulz (2001), currency movements have almost a negligible impact on the value of
industries around the world.
11. See, for example, Bartov and Bodnar (1994), Choi and Prasad (1995), Dahlquist and
Robertsson (2001), Dominguez and Tesar (2001), Bodnar and Wong (2003) and Muller
and Verschoor (2006, 2007a,b).
12. The annihilating impact of hedging activities on currency risk exposure has been
discussed by Adler and Dumas (1984), Bodnar and Gentry (1993) and Bartov et al.
(1996).
13. This assumption is supported by the huge influence of the 1997 Asian financial crisis on US
trade deficits as US trade deficits were brought to a historical low in 1998 with $240 billion.
14. The four different test samples are: Thailand (88), Malaysia (97), Indonesia (71) and
Korea (116). Note that some firms appear in more than one country sample.
15. These firms are as well the constituents of four different control samples: Thailand
(324), Malaysia (360), Indonesia (256) and Korea (420).
16. The Thai parity was officially set according to an undisclosed basket of currencies but
its behavior suggests that the US dollar accounted for more than 90 per cent of the
value of the basket (Frankel and Wei, 1994).
17. The Malaysian post-crisis window is shorter than two years as we stop our post-crisis
sample period on 26 August 1998 before the Malaysian authorities decided to return to
a conventional peg arrangement. On the other hand, the Indonesian pre-crisis window
covers only 20 months as reliable data on the Thai baht currency movements are only
available since 22 November 1995.
18. Under the assumption that the observations are independent of one another.
19. For Indonesia, both the t-test and the Wilcoxon-test reject the null hypothesis whereas
for Malaysia, the Wilcoxon rejects the null hypothesis that the Median of the relative
variances of the test sample is equal to the Median of the control sample.
20. Note that the sign of the exchange rate exposure coefficient becomes less distinct for
a company that imports as well as exports. See, for example, Adler and Dumas
(1984) and He and Ng (1998) for their suggestion that the sensitivity of the firm value
to exchange rate fluctuations depends on the elasticity of the firms demand for
foreign goods relative to the elasticity of the foreign markets demand for the firms
goods.
21. See, for example, Bollerslev et al. (1992) and Nieuwland et al. (1994).
22. Betas are measures of a firms return sensitivity relative to the market. Therefore,
some betas must go down if others go up.
23. In contrast, 182 vs 166 control firms were significantly affected by Asian exchange rate
movements before, respectively, after the currency crisis.
24. In contrast to our finding, Dominguez (1998) show that Japanese firms are more
engaged in hedging activities when the Japanese yen/US dollar exchange rate volatility
was highest.
Exchange risk
exposure of US
multinationals
737
MF
33,9
738
25. Using a one-factor market model, Chen and So (2002) empirically document a rise in the
beta coefficients of US multinationals with sales in the Asia-Pacific region during the
period of increased exchange rate variability after the 1997 crisis.
26. The composition of these industry-specific test samples reveals that they contain
mainly firms from the agricultural sector.
27. Indeed US agricultural exports towards Asia fell by nearly one-third in 1998 (Orden,
2000).
28. This is not however verified for the three control sample firms that have been sorted
out to match the unique US agriculture test sample company that has been active in
Thailand during the crisis episode.
29. Tests confirm that these increases were highly statistically significant.
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Further reading
Edwards, S. (1999), On crisis prevention: lessons from Mexico and East Asia, NBER working
paper No. 7233, Cambridge, MA.
Exchange risk
exposure of US
multinationals
739
MF
33,9
International Monetary Fund (1999), Malaysia: selected issues, country report no. 99/86,
International Monetary Fund, Washington, DC, August.
Van Rijckeghem, C. and Weder, B. (2001), Sources of contagion: is it finance or trade?, Journal of
International Economics, Vol. 54, pp. 293-308.
740
Corresponding author
William F.C. Verschoor can be contacted at: w.verschoor@fm.ru.nl
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The Asian crisis exchange risk

Nijmegen School of Management, Radboud University Nijmegen,

The purpose of this paper is to increase our understanding of the (time-varying)

Before the currency regime shift

After the currency regime shift

Panel A: Thailand, July 1997

Panel A: Thailand, July 1997

H0. equality of means

H0. equality of medians

Panel B: Malaysia, July 1997

H0. equality of means

H0. equality of medians

Panel C: Indonesia, August 1997

H0. equality of means

H0. equality of medians

H0. equality of means

H0. equality of medians

"i;t i;t hi;t 2

Control sample (SD)

Test sample (SD)

Panel B: Malaysia, July 1997

Control sample (SD)

Currency risk exposure

Test sample (SD)

Control sample (SD)

Panel A: Thailand, July 1997

Changes in risk across

Test sample (SD)

Control sample (SD)

Currency risk exposure

Test sample (SD)

Control sample (SD)

Test sample (SD)

Control sample (SD)

Panel D: Korea, December 1997

Control sample (SD)

Panel C: Indonesia, August 1997

Currency risk exposure

Test sample (SD)

Control sample (SD)

"i;t i;t hi;t 2

hi;t i "2i;t1 hi;t1

Rit i i Rmt i Xt "i;t

Rit i i Rmt i Xt "i;t

Currency risk exposure

Wholesale and retail trade

Finance, insurance and real estate

Chemicals, plastics and petroleum related

Manufacturing (metals related)

Transportation, com. and utilities

Transportation, com. and utilities

Manufacturing (metals related)

Chemicals, plastics and petroleum related

Panel A: Thailand, July 1997

Changes in risk across

Chemicals, plastics and petroleum related

Manufacturing (metals related)

Transportation, com. and utilities

Wholesale and retail trade

Finance, insurance and real estate

Panel B: Malaysia, July 1997

"i;t i;t hi;t 2

"i;t i;t hi;t 2

hi;t i "2i;t1 hi;t1

"i;t i;t hi;t 1=2

"i;t i;t hi;t 1=2

hi;t i "2i;t1 hi;t1