Malaysia-EU Trade at the Industry Level: Is there an Asymmetric Response to Exchange Rate Volatility?

A study in this journal that assessed the impact of exchange rate volatility on Malaysia-EU trade at commodity level used the linear ARDL approach of Pesaran et al. (2001) and did not find significant effects in most of the 81 Malaysian exporting and 66 importing industries. In this paper, we argue for asymmetric effects of exchange rate volatility on the same industries’ trades which implies using Shin et al.’s (2014) nonlinear ARDL approach. While we find short-run asymmetric effects of volatility in almost all industries, we find evidence of adjustment asymmetry in 17 exporting and nine importing industries. We also find significant impact or short-run cumulative asymmetry in 12 exporting and six importing industries. The most important finding is significant long-run asymmetric effects in 36 Malaysian exporting industries and 25 Malaysian importing industries. Clearly, trade flows react to an increased exchange rate volatility differently than to a decreased volatility.