Time-Varying Exchange Rate Exposure Coefficients (Exposure Betas) : Evidence from Country Level Stock Returns

This paper uses time-varying second moments to investigate exchange rate exposure betas. Using a BEKK-GARCH(1,21)-M model, time-varying exchange rate exposure betas are obtained with explicit focus on the non-orthogonality between exchange rate changes and market returns. We look into certain aspects of the stochastic structure underlying the exposure betas. An important finding of the paper is that, although exchange rate exposure betas are likely to vary over time, they follow mean-reverting long-memory processes. The presence of mean-reverting exchange rate exposure coefficients has important implications for investment and hedging strategies