Quantile Regression Analysis of Exchange Rate Exposure in Cross-Country Sector Portfolios
40 Pages Posted: 27 Sep 2011 Last revised: 14 Nov 2012
Date Written: September 19, 2011
This study empirically examines the robustness of impact of exchange rate exposure on cross-country sectors portfolios using the quantile regression approach. The parts of the return distribution in which the investors and risk managers are interested are at extreme outcomes in the tails, which go beyond the mean values. Therefore, quantile regression approach seems more appropriate. We analyzed bilateral (Swedish Kroner and Euro currencies) exchange-rate exposure and its impact on similar sectors across small, open and export-oriented economies of Sweden and Finland. These two countries represent an interesting case study as they have similar industrial structure, yet Sweden uses its Swedish Kroner, whereas Finland has joined the euro in 1999. The results from our analysis indicate that Finnish Sector portfolios have a greater impact of exchange rate movements with regards to the Swedish excess return portfolios and global market index return in the post-euro period. The estimated quantiles results in comparison to the least squares results are more robust, which are consistent with previous literature.
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