Foreign exchange rate risk and Thai stock market

Abstract

To investigate how exchange rate returns effect return on investment in industries from the switching of exchange rate regime in June 2, 1997 that cause Asian economic crisis. The methodology is an unconditional two-factor model, estimated by Generalized Methods of Moments (GMM) to test the impact of bilateral exchange rate with three main traders (US, JP and EU) from 1992 to 2004. Moreover, this paper will explore another specification by extending the two-factor model. The first alternative is augmented with an interest rate spread factor. The second alternative specification is augment with two additional factors intendings to capture the effect of domestic interest rate and foreign interest rate. The results of the study show that there is no significant exchange rate coefficient in any currencies before the crisis in 1997. After the crisis, there are some sectors that are affected from domestic depreciation, some sectors benefit and some sectors suffer. The exchange rate risk is not significant in any currencies. A possible explanation is that the exchange rate risk is diversified across industries and/or across time. Extending two-factor model, additional explanatory variables are included to increase explanatory power. The results support robustness of using unconditional two-factor model.