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Modeling jumps in returns of financial assets as M4 processes: Measured exchange rate exposure of Asian equity portfolio

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Abstract

Previous work on the exposure of equity markets to exchange rate risk, surprisingly, found stock returns were not significantly affected by exchange rate fluctuations. In this paper, we examine the relation between China, Japan and USA MSCI (Morgan & Stanley Capital International) daily equity index returns and SAFE (State Administration of Foreign Exchange) exchange rate returns of Chinese RMB and Japanese Yen in US dollar. We find a significant relation between Asian foreign equity stock returns and Chinese RMB and Japanese Yen exchange rate returns. This article incorporates foreign exchange values as partial determinants of Asian foreign equity market returns and suggests that currency risk is of hedging concern to investors with implications for portfolio management. We implement our result in portfolio’s CaR determination under VaR constraints.

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Authors and Affiliations

  1. School of Management, Tianjin University, Tianjin, 300072, China

    Djibrilla Moussa & Wei Zhang

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  1. Djibrilla Moussa
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  2. Wei Zhang
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Djibrilla Moussa, Lecture University of Bamako, Mali; Master degree in engineering in Applied Mathematics from Tianjin science (1999); Ph.D. in Financial management science from Tianjin university (2005), interested in Risk management by extreme value theory.

Wei Zhang, Ph.D. in Systems Engineering: Professor of Finance at both Tianjin University and Tianjin University of Finance and Economics; Associate Editor at Journal of Management Sciences in China, Management Review. Research interests: Financial Engineering and Risk Management, Entrepreneurial Finance.

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Moussa, D., Zhang, W. Modeling jumps in returns of financial assets as M4 processes: Measured exchange rate exposure of Asian equity portfolio. J. Syst. Sci. Syst. Eng. 14, 364–380 (2005). https://doi.org/10.1007/s11518-006-0199-2

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  • DOI: https://doi.org/10.1007/s11518-006-0199-2

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