Short-term exchange rate exposure: evidence from stock returns of New Zealand firms

Abstract

This thesis examines the relationship between exchange rate movements and stock returns for selected NZ firms. First of all, it analyses the foreign exchange rate exposure of New Zealand firms' stock returns using the exchange rate factor return in an augmented market model for the period of 01/01/2004 - 31/12/2004. Secondly, it employs a dummy variable to investigate the hypothesis that exchange rate exposure is asymmetric over appreciation-depreciation cycles. Thirdly, this paper is motivated to smooth the time series of the exchange rate and modifies dummy variables for the appreciation-depreciation cycles to examine the asymmetric effect. Finally, since the US and Australia are the major trading partners of New Zealand, this study employs the NZ/US-dollar and the NZ/Australian-dollar separately as the independent variables for stock returns. Overall, the results show 27 out of 120 firms listed on the New Zealand Stock Exchange having statistically significant exchange rate exposure to the NZ/US-dollar, and 18 out of 120 firms having statistically significant exchange rate exposure to the NZ/Australian-dollar. It also finds: i) some evidence of asymmetric exposure in response to the NZD/USD or NZD/AUD exchange rates; and ii) stronger evidence of asymmetric exposure after smoothing the exchange rate.