Assessing Multiscale Exchange Rate Exposure of Electronic and Electrical Firms in Malaysia: An Application of Wavelet Analysis

Abstract

The study undertakes an in-depth study to explain cross-sectional variation of currency exposure
across different time scales involving 15 electronics and electrical corporations in Malaysia from 21st
July 2005 until 31st December. Past studies focused on the aggregate measurement of currency
exposure which ignored the potential heterogeneity of investment holding period and created bias in
estimation. To address the problem, discrete wavelet transformation (DWT) approach is employed to
decompose a given time series into several frequency domains. This study finds that the level of
currency exposure of the corporations exhibits heterogeneous trends across different time scales
where a high level of exposure is concentrated at a higher time scale. From the findings, the study
suggests that the exchange risk pricing must incorporate time scales effect in measurement and
vigorous foreign exchange risk management routine should be focused primarily on widened
investment interval.