ESSAYS ON EXCHANGE RATE EXPOSURE

Abstract

This thesis consists of three essays with a common quest for a deeper understanding of exchange rate exposure. To this end, GARCH-type models are used to incorporate several intrinsic features of the exposure process. The first essay looks into sign and magnitude asymmetries and suggests a new measure to assess the overall impact of exchange rate changes in the presence of asymmetries. The second essay examines the adequacy of the exposure coefficient in measuring the entire impact of exchange rate changes on firmsa?? future operating cash flows. There is evidence for some elements of exposure which are not captured by the conventional measure. The third essay inquires into the time-varying behaviour of exchange rate exposure. Time-varying exposure coefficients are found to be mean-reverting and could follow a long- memory process. Overall, the findings imply that the negligence of these intrinsic features may result in under/over estimated measures of exposure.