Symmetric and asymmetric exchange rate exposure: Evidence from Malaysian non-financial firms

Abstract

Despite minimal exchange rate exposure previously found in developed region, comprehensive study on the level of exchange rate exposure in a small open economy such as Malaysia remains scarce. Additionally, ignoring the direction of currency movement inflicts bias in estimation due to the commingling of positive and negative exposure. Hence, this paper examines the symmetric and asymmetric exchange rate exposure of 207 Malaysian non-financial firms at both aggregate and firm levels. Employing data from 1995 to 2016, the panel analysis found significant aggregate stock returns exposure to changes in the USD, mainly due to the strong US position as Malaysia’s major trading partner. Next, the firm-level analysis involving regression with GARCH(1,1) specification concludes that 35.75% of our sample firms are affected by the symmetric exposure. The higher exposure of Malaysia sample firms relative to western economies reflects the lack of hedging exercises and considerably moderate growth of derivatives market in Malaysia. In term of asymmetric exposure, there are large proportions of firms significantly affected by the USD appreciation. Inclusion of five sub-periods comprising two financial crises and pegging regime into the analyses indicates different significance levels throughout the periods. The detailed results of the study offer better insights for firm manager in making strategic decisions towards effective currency exposure management.