An analysis of asymmetry in foreign currency exposure of the Australian equities market

Using both daily and monthly data, the authors: (a) analyse the extra-market component of foreign exchange exposure of the Australian equities market using the Australian/US exchange rate factor return in an augmented market model; and (b) use a dummy variable specification to model the potential asymmetric effect induced by non-linear hedging strategies, such as using currency options, for the period 1988-1996. Overall, the results are mixed. The following are found: (i) stronger evidence of foreign exchange exposure in the analysis employing daily data; (ii) when using daily data, a stronger lagged response than a contemporaneous response is observed; (iii) some evidence of asymmetry; and (iv) evidence of significant exchange rate exposures of the predicted sign in several industries. Further, the findings using monthly data are less significant than those using daily data.