Abstract

While depreciation may raise export revenue, associated exchange risk could offset any positive effect. The present paper investigates this net effect for eight Asian countries using a bivariate GARCH-M model that simultaneously estimates time varying risk. The fundamental result is that export markets react differently to exchange rates and associated risk. High degrees of risk apparently stimulate efforts to avoid its impact. Exchange risk has a dominating negative impact for the appreciating Japanese yen. Depreciation has no impact in Malaysia and Singapore, and exchange risk has a negative effect in Singapore. For the other five countries, depreciation stimulates export revenue but risk leads to a negative net effect in Taiwan.

Keywords: Depreciation; Exchange risk; Exports; Bivariate GARCH-M

JEL classification codes: F14; F31