A Study of Exchange and Interest Rate Exposure in Taiwan Industry Indexes
Date Issued
2010
Date
2010
Author(s)
Chen, Cheng-Han
Abstract
Taiwan is a small open economy with high degree of dependence on foreign trade, so the exchange and interest rate are the two major macroeconomic variables which influence the cost and profit in the business activities very much. This study uses the seeming unrelated regression method to examine the exchange and interest rate exposure in Taiwan industries. And then we use the nonlinear seeming unrelated regression method to estimate the exchange and interest rate risk premiums based on the model derived from arbitrage pricing theory.
In the empirical results, we find 33.33% of them exhibit significant exchange rate exposure for the 2000.1 ~ 2004.3 period. For the period 2004.4 ~ 2008.4, there are no industry with significant exchange rate exposure. And during the full period, we find 26.67% of them exhibit significant exchange rate exposure.
For the interest rate exposure examination, it is hard to find the interest rate exposure. The theory indicates that stock returns for the industry decline in the face of rising interest rate. However our results indicate the opposite. In addition to the lagged effect, we use the 30-day commercial paper as the interest rate factor may have limited effects on the interest rate exposure.
Subjects
exchange rate exposure
interest rate exposure
exchange rate risk premium
interest rate risk premium
seeming unrelated regression (SUR)
arbitrage pricing theory (APT)
Type
thesis
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