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Review of Quantitative Finance and Accounting

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01.10.2013 | Original Research

Measuring currency exposure with quantile regression

verfasst von: Ding Du, Pin Ng, Xiaobing Zhao

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2013

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Abstract

In this paper, we explore an alternative explanation of the exposure puzzle, the missing variable bias in previous studies. We propose to correct the bias with the quantile regression technique invented by Koenker and Bassett (Econometrica 46:33–51, 1978). Empirically, as soon as we take into account the missing variable bias as well as time variation in currency exposure, we find that 26 out of 30 or 87 % of the US industry portfolios exhibit significant currency exposure to the Major Currencies Index, and 23 out of 30 or 77 % show significant exposure to the Other Important Trading Partners Index. Our results have important theoretical and practical implications. In terms of theoretical significance, our results strengthen the findings in Francis et al. (J Financ Econ 90:169–196, 2008), and suggest that methodological weakness, not hedging, may explain the insignificance of currency risk in previous studies. In terms of practical significance, our results suggest a simple yet efficient approach for managers to estimate currency exposure of their firms.

Vorheriger Artikel A fractional cointegration approach to testing the Ohlson accounting based valuation model

Nächster Artikel Comparing the information in short sales and put options

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See Taylor and Taylor (2004) for a review.

See also Khoo (1994), Bartov and Bodnar (1994), Cheung et al. (1995), Allayannis (1997), Chow et al. (1997), Chiao and Hung (2000), Bodnar and Wong (2003), Bartram (2004), (2007), Bartram and Bodnar (2005), Elyasiani and Mansur (2005), and Du and Hu (2012a, 2012b).

A few of the good primers for quantile regression are Koenker and Hallock (2001), Cade and Noon (2003), Yu et al. (2003), and Koenker (2005).

Major currency index includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden.

Countries whose currencies are included in the other important trading partners index are Mexico, China, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Thailand, Philippines, Indonesia, India, Israel, Saudi Arabia, Russia, Argentina, Venezuela, Chile and Colombia.

The data are available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/.

For service industries, we do not have relevant data from the US International Trade Commission to compute their trade balances.

We also experimented with the lag parameter set to 4, 8, 16 and the results are qualitatively similar.

They are Games (Recreation), Hshld (Consumer Goods), Clths (Apparel), Txtls (Textile), Autos (Automobiles and Trucks), Mines (Precious Metals, Non-Metallic, and Industrial Metal Mining), and Bus Eq (Business Equipment).

They are Smoke (Tobacco Products) and Steel (Steel Works Etc).

They are Food (Food Products), Games (Recreation), Hshld (Consumer Goods), Clths (Apparel), Txtls (Textile), EleEq (Electrical Equipment), Autos (Automobiles and Trucks), Mines (Precious Metals, Non-Metallic, and Industrial Metal Mining), and BusEq (Business Equipment).

They are Food (Food Products), Smoke (Tobacco Products), Chems (Chemicals), Steel (Steel Works Etc), FebPr (Fabricated Products and Machinery), EleEq (Electrical Equipment), Autos (Automobiles and Trucks), and Coal (Coal).

An alternative explanation for our findings is that quantile regression may capture the long-horizon exposure suggested by Chow et al. (1997), Bodnar and Wong (2003) and Bartram (2007). As Bartram (2007) point out: “Estimating exposures over longer horizons may be useful since it is possible that they can be estimated more accurately given the complexities of the factors determining exposure and the noise in high-frequency exchange rates relative to the persistence of movements with low frequency” (p. 987). If monthly exchange rate changes are noisy proxy for persistent exchange rate changes, additional instrument variables may be necessary to estimate persistent exchange rate movements (for instance, FHH use imports, exports, and the federal funds rate to forecast future exchange rate changes). As a result, the standard specification of Eqn. (1) may again suffer missing variable biases, since additional instrument variables that help predict persistent movements in exchange rates are not included. Consequently, quantile regression may help take into account the effects of missing variables and capture the long-horizon exposure.

Hedging costs should also be taken into account.

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Titel: Measuring currency exposure with quantile regression
verfasst von: Ding Du
Pin Ng
Xiaobing Zhao
Publikationsdatum: 01.10.2013
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2013
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-012-0322-z

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