The Wavelet Multi-Scale Analysis of Exchange Rate Exposure: An Application to Malaysian Consumer Products and Services Sector

Abstract

Objective – Past efforts in assessing foreign exchange rate exposure assume homogeneity in the level of exposure across time horizons which seems to be impractical due to the dynamic nature of comovement between firm value and exchange rate. Methodology – Given this, the study aimed to investigate the multi-scale relationships between changes in exchange rates and firm values of 56 multinational corporations in the consumer products and services sector from January 2000 to December 2020. Findings – The novelty of the study lies upon the application of Maximal Overlap Discrete Wavelet Transformation (MODWT) method which allows decomposition of a single time series domain into different time domains. The fragmentation into multiple time domains allows the measurement of scale-dependent foreign exchange exposure. As a result, the study discovered a non-monotonic trend for wavelet scale j of currency exposure across time scales. In particular, there was a gradual increase in the magnitude of beta exchange exposure and the proportion of exposed firms from low to high time scales. This finding suggested that firm value is more sensitive to changes in the exchange rate within a widened time domain. Novelty – The study demonstrated on how the wavelet technique can be used to measure foreign exchange risk and aided firm managers and market participants in managing foreign exchange risk for a specific time interval. Type of Paper: Empirical JEL Classification: E42, F31, F39 Keywords: Currency exposure; multi-horizon exchange rate; Malaysian Sectors; Wavelet Analysis; MODWT. Reference to this paper should be made as follows: Wahab, H.A; Nasir, N.A.M. (2023). The Wavelet Multi-scale Analysis of Exchange Rate Exposure: An Application to Malaysian Consumer Products and Services Sector, J. Fin. Bank. Review, 8(1), 58 – 72. https://doi.org/10.35609/jfbr.2023.8.1(3)