Assessing The Effect Of Asymmetry, Time-Varying, Multiscale And Corporate Hedging Towards Foreign Currency Exposure Of Malaysian Non-Financial Firms

Foreign currency fluctuations are one of the key sources of market risks for firms with global operations. Firms in developing countries face greater foreign exchange exposure level due to higher market openness and hedging intensity. However, comprehensive study on the level of exchange rate exposure in a small open economy such as Malaysia remains scarce. As existing studies of currency exposure in Malaysia ignore the asymmetric relationship of firm value and exchange rate movement that could cause estimation bias, the first objective of this study analyses the symmetric and asymmetric exchange rate exposure of non-financial firms in Malaysia. Data are collected from 207 non-financial firms from 1995 to 2016. On the overall symmetric exposure, the analysis finds significant negative overall stock returns exposure to changes in the USD. The firm-level analysis is conducted using regression with GARCH(1,1) specification and finds that symmetric exposure significantly affected 35.75% of the sample firms. As for asymmetric exposure, 16.43% of the firm are significantly affected by the USD appreciation, while 10.14% firms are significantly affected by the USD depreciation. Sensitivity of Malaysia’s open economy towards market changes leads to the second objective which analyses currency exposure level by considering the time-varying factor. The findings show decreasing exposure levels throughout the sub-periods, with notable different significant levels during Asian financial crisis (AFC), global financial crisis (GFC) and peg periods suggesting event specific nature of foreign exchange exposure. Afterward, existence of vast investment preferences in the market drives the third objective which focuses on multiscale exchange rate exposure by using the maximal overlap discrete wavelet transformation (MODWT) analysis on daily data. The study finds higher and negative exposure at higher time scale (wider investment horizon) for the overall analysis. Sequentially, low level of hedging practice shown in our preliminary analysis prompts the study to further analyse the effect of corporate hedging practices towards the sample firms. The hedging practice is segregated into financial and operational hedging. The findings show significant effect of financial hedging in managing the currency exposure level. However, operational hedging fails to exert significant influence towards firm value for both cross-countries and regional diversifications. Our results offer broadly applicable implications for Malaysian firms with high currency exposure to consider the financial derivatives in their foreign exchange risk management strategies. For operational hedging, the effectiveness of geographical diversification could be enhanced under greater regional expansion where diversification benefits could be fully realised.