The Impact Of Thin Trading Adjustments On Exchange Rate Exposure

Jaratin Lily, Imbarine Bujang, Abdul Aziz Karia
(Submitted 9 July 2018)
(Published 2 June 2022)


This study investigates the multiple exchange rate exposure of large non-financial firms in Asia and emerging countries using the unadjusted and adjusted two-factor exchange rate exposure model. The autoregressive-distributed lag (ARDL) method was applied to investigate the existence of exchange rate exposure. The Dimson-Fowler-Rorke (DFR) adjustment method was applied to adjust the ordinary least squares (OLS) market risk estimator for the thin trading phenomenon. The study’s findings indicate that exchange rate exposure does affect firm value. Incorporating the DFR market beta in the exchange rate exposure model indicates two important findings. Firstly, there is a significant increase in the number of firms exposed to exchange rate movements, especially in Indonesia, Thailand, Sri Lanka, and Vietnam. Secondly, there are more firms that will be exposed to multi bilateral exchange rate exposure across the sample countries. The findings imply that market characteristics such as thin trading could be an alternative explanation of the exchange rate exposure puzzle. Furthermore, future research should include asymmetric analysis as an alternative explanation for exchange rate exposure.


Exchange Rate Exposure; Thinness Market; Beta Adjustment; ARDL; Asian countries

Full Text: PDF

DOI: 10.22146/gamaijb.36806


Abd. Sukor, M. E. (2014) ‘Exchange rate exposure of developed and emerging markets : A re­view’, International Review of Research in Emerging Markets and the Global Economy (IRREM), 1(2), pp. 59–65.

Adler, M. and Dumas, B. (1984) ‘Exposure to Currency Risk: Definition and Measurement’, Fi­nancial Management, 13(2), pp. 41–50. doi:

Aggarwal, R. and Harper, J. T. (2010) ‘Foreign Exchange Exposure of “Domestic” Corpora­tions’, Journal of International Money and Finance, 29(8), pp. 1619–1636. doi: 10.1016/j.ji­monfin.2010.05.003.

Agyei-Ampomah, S., Mazouz, K. and Yin, S. (2012) ‘The foreign exchange exposure of UK non-financial firms: A comparison of market-based methodologies’, International Review of Financial Analysis, 29, pp. 251–260. doi: 10.1016/j.irfa.2012.05.006.

Aizenman, J., Hutchison, M. and Noy, I. (2011) ‘Inflation Targeting and Real Exchange Rates in Emerging Markets’, World Development, 39(5), pp. 712–724. doi: 10.1016/­dev.2010.11.005.

Al-Ajmi, J. (2015) ‘Beta Estimation and Thin Trading: Evidence from Bahrain Bourse’, Interna­tional Journal of Economics and Finance, 7(7), pp. 163–178. doi: 10.5539/ijef.v7n7p163.

Alssayah, A. and Krishnamurti, C. (2013) ‘Theoretical Framework of Foreign Exchange Expo­sure, Competition and the Market Value of Domestic Corporations’, International Journal of Economics and Finance, 5(2), pp. 1–14. doi: 10.5539/ijef.v5n2p1.

Bacha, O. I. et al., (2013) ‘Foreign exchange exposure and impact of policy switch – the case of Malaysian listed firms’, Applied Economics, 45(20), pp. 2974–2984. doi: 10.1080/00036846.2012.684790.

Bai, Y. and Green, C. J. (2011) ‘Determinants of cross-sectional stock return variations in emerg­ing markets’, Empirical Economics, 41(1), pp. 81–102. doi: 10.1007/s00181-010-0437-9.

Banerjee, A., Dolado, J. and Mestre, R. (1998) ‘Error-correction Mechanism Tests for Cointegra­tion in a Single-equation Framework’, Journal of Time Series Analysis, 19(3), pp. 267–283. doi: 10.1111/1467-9892.00091.

Bartholdy, J. and Riding, A. (1994) ‘Thin Trading And The Estimation of Betas: The Efficacy of Alternative Techniques’, Journal of Financial Research, 17(2), pp. 241–254.

Bartov, E. and Bodnar, G. M. (1994) ‘Firm valuation, earnings expectations, and the exchange-rate exposure effect’, The Journal of Finance, 49, pp. 1755–1785. doi: 10.2307/2329270.

Bartram, S. M. (2007) ‘Corporate cash flow and stock price exposures to foreign exchange rate risk’, Journal of Corporate Finance, 13(5), pp. 981–994. doi: 10.1016/j.jcorpfin.2007.05.002.

Bartram, S. M. (2008) ‘What lies beneath: Foreign exchange rate exposure, hedging and cash flows’, Journal of Banking & Finance, 32(8), pp. 1508–1521. doi: 10.1016/j.jbankfin.2007.07.013.

Bartram, S. M. and Bodnar, G. M. (2007) ‘The exchange rate exposure puzzle’, Managerial Finance, 33(9), pp. 642–666. doi: 10.1108/03074350710776226.

Bartram, S. M. and Bodnar, G. M. (2012) ‘Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets’, Journal of International Money and Finance, 31(4), pp. 766–792. doi: 10.1016/j.jimonfin.2012.01.011.

Bartram, S. M., Brown, G. W. and Conrad, J. (2011) ‘The Effects of Derivatives on Firm Risk 146

and Value.’, Journal of Financial and Quantitative Analysis, 46(4), pp. 967–999. doi: 10.1017/ S0022109011000275.

Bartram, S. M., Brown, G. W. and Minton, B. A. (2010) ‘Resolving the exposure puzzle: The many facets of exchange rate exposure’, Journal of Financial Economics, 95(2), pp. 148–173. doi: 10.1016/j.jfineco.2009.09.002.

Bekaert, G. and Harvey, C. R. (2003) ‘Emerging markets finance’, Journal of Empirical Finance, 10(1–2), pp. 3–55. doi: 10.1016/S0927-5398(02)00054-3.

Bergbrant, M. C., Campbell, K. and Hunter, D. M. (2014) ‘Firm-Level Competition and Ex­change Rate Exposure: Evidence from a Global Survey of Firms’, Financial Management, 43(4), pp. 885–916. doi: 10.1111/fima.12051.

Boabang, F. (1996) ‘an Adjustment Procedure for Predicting Betas When Thin Trading Is Present: Canadian Evidence.’, Journal of Business Finance & Accounting, 23(9/10), pp. 1333–1356. Available at:­th&AN=6790146&site=ehost-live.

Bodnar, G. M. and Wong, M. H. F. (2003) ‘Estimating exchange rate exposures: Issues in model structure’, Financial Management, 32(1), pp. 35–67. Available at:­ble/3666203 (Accessed: 18 August 2013).

Brissimis, S. N. and Kosma, T. S. (2007) ‘Market power and exchange rate pass-through’, Interna­tional Review of Economics & Finance, 16(2), pp. 202–222. doi: 10.1016/j.iref.2004.12.013.

Brooks, R. D. et al., (2005) ‘Alternative beta risk estimators in cases of extreme thin trad­ing: Canadian evidence’, Applied Financial Economics, 15(18), pp. 1251–1258. doi: 10.1080/09603100500396585.

Chang, F.-Y., Hsin, C.-W. and Shiah-Hou, S.-R. (2013) ‘A re-examination of exposure to ex­change rate risk: The impact of earnings management and currency derivative usage’, Journal of Banking & Finance, 37(8), pp. 3243–3257. doi: 10.1016/j.jbankfin.2013.03.007.

Chou, D.-W. et al., (2017) ‘A revisit to economic exposure of U.S. multinational corporations’, The North American Journal of Economics and Finance, 39(1), pp. 273–287. doi: 10.1016/j. najef.2016.10.011.

Chue, T. K. and Cook, D. (2008) ‘Emerging market exchange rate exposure’, Journal of Banking & Finance, 32(7), pp. 1349–1362. doi: 10.1016/j.jbankfin.2007.11.005.

Cook, J. A. (2014) ‘The effect of firm-level productivity on exchange rate pass-through’, Econom­ics Letters, 122(1), pp. 27–30. doi: 10.1016/j.econlet.2013.10.028.

Copeland, T. and Copeland, M. (1999) ‘Managing Corporate FX Approach Maximizing’, Finan­cial Management, 28(3), pp. 68–75.

Coy, J. M. (2013) ‘Impact of the Greece Crisis on Corporate Exposure to the EURO’, Journal of International Business Research, 12(1), pp. 11–22.

Davidson, S. and Josev, T. (2005) ‘The Impact of Thin Trading Adjustments on Australian Beta Es­timates’, Accounting Research Journal, 18(2), pp. 111–117. doi: 10.1108/10309610580000679.

Delatte, A.-L. and López-Villavicencio, A. (2012) ‘Asymmetric exchange rate pass-through: Evi­dence from major countries’, Journal of Macroeconomics, 34(3), pp. 833–844. doi: 10.1016/j. jmacro.2012.03.003.

Dickey, D. A. and Fuller, W. A. (1979) ‘Distribution of the estimators for autoregressive time series with a unit root’, Journal of the American Statistical Association, 74(366), pp. 427–431. 147

doi: 10.2307/2286348.

Dimson, E. (1979) ‘Risk measurement when shares are subject to infrequent trading’, Journal of Financial Economics, 7, pp. 197–226. doi: 10.1016/0304-405X(83)90039-9.

Dong Loc, T., Lanjouw, G. and Lensink, R. (2010) ‘Stock-market efficiency in thin-trading mar­kets: the case of the Vietnamese stock market’, Applied Economics, 42(27), pp. 3519–3532. doi: 10.1080/00036840802167350.

Dornbusch, R. and Fischer, S. (1980) ‘Exchange Rates and the Current Account’, American Eco­nomic Review, 70(5), pp. 960–971. doi: 10.1126/science.151.3712.867-a.

Du, D. and Hu, O. (2014) ‘The long-run component of foreign exchange volatility and stock returns’, Journal of International Financial Markets, Institutions and Money, 31(1), pp. 268–284. doi: 10.1016/j.intfin.2014.04.005.

Du, D., Hu, O. and Wu, H. (2014) ‘Emerging market currency exposure: Taiwan’, Journal of Mul­tinational Financial Management, 28, pp. 47–61. doi: 10.1016/j.mulfin.2014.10.001.

El-Masry, A. (2006) ‘The exchange rate exposure of UK non-financial companies: Industry level analysis’, Managerial Finance, 32(2), pp. 115–136. doi: 10.1108/03074350710776217.

El-Masry, A., Abd-Elsalam, O. H. and Abdel-Salam, O. (2007) ‘Exchange rate exposure: do size and foreign operations matter?’, Managerial Finance, 33(9), pp. 741–765. doi: 10.1108/03074350710776262.

El-Masry, A., Abdel-Salam, O. and Alatraby, A. (2007) ‘The exchange rate exposure of UK non-financial companies’, Managerial Finance. Edited by A. El-Masry, 33(9), pp. 620–641. doi: 10.1108/03074350710776217.

Fama, E. F. and French, K. R. (2004) ‘The Capital Asset Pricing Model: Theory and Evidence’, The Journal of Economic Perspectives, 18, pp. 25–46. doi: 10.1257/0895330042162430.

Flodén, M., Simbanegavi, W. and Wilander, F. (2008) ‘When is a lower exchange rate pass-through associated with greater exchange rate exposure?’, Journal of International Money and Finance, 27(1), pp. 124–139. doi: 10.1016/j.jimonfin.2007.04.013.

Fowler, D. J. and Rorke, C. H. (1983) ‘Risk measurement when shares are subject to infrequent trading: Comment’, Journal of Financial Economics, 12(2), pp. 279–283. doi: 10.1016/0304- 405X(83)90039-9.

Fowler, D. J., Rorke, C. H. and Jog, V. M. (1989) ‘A bias-correcting procedure for Beta estimation in the Presence of Thin Trading’, The Journal of Finanial Research, 12(1), pp. 23–32.

Galagedera, D. U. A. (2007) ‘A review of capital asset pricing models’, Managerial Finance, 33(10; 10), pp. 821–832. doi: 10.1108/03074350710779269.

Gomes Neto, D. and Veiga, F. J. (2013) ‘Financial globalization, convergence and growth: The role of foreign direct investment’, Journal of International Money and Finance, 37, pp. 161– 186. doi: 10.1016/j.jimonfin.2013.04.005.

Hasnaoui, H. (2014) ‘Alternative Beta Risk Estimators in Emerging Markets: The Case of Tuni­sia’, Journal of Business and Finance, 2(1), pp. 57–64. Available at: http://www.escijournals. net/index.php/JBF/article/view/611.

Ho, L. S. (2012) ‘Globalization, exports, and effective exchange rate indices’, Journal of Internation­al Money and Finance, 31(5), pp. 996–1007. doi: 10.1016/j.jimonfin.2011.12.007.

Hsiao, F. D. and Han, L. (2012) ‘Exchange Rate Effects on a Small Open Economy: Evidence from Taiwanese Firms’, The International Journal of Business and Finance Research, 6(3), pp. 148


Hutson, E. and Laing, E. (2014) ‘Foreign exchange exposure and multinationality’, Journal of Banking and Finance, 43, pp. 97–113. doi: 10.1016/j.jbankfin.2014.03.002.

Hutson, E., O’Driscoll, A. and O’Driscoll, A. (2010) ‘Firm-level exchange rate exposure in the Eurozone’, International Business Review, 19(5), pp. 468–478. doi: 10.1016/j.ibus­rev.2009.02.007.

Ibrahim, M. H. (2008) ‘The Exchange-Rate Exposure of Sectoral Stock Returns: Evidence From Malaysia.’, International Journal of Economic Perspectives, 2(2), pp. 64–76.

Iqbal, J. and Brooks, R. (2007) ‘Alternative beta risk estimators and asset pricing tests in emerg­ing markets: The case of Pakistan’, Journal of Multinational Financial Management, 17(1), pp. 75–93. doi: 10.1016/j.mulfin.2006.04.001.

Jorion, P. (1990) ‘The Exchange-rate Exposure of U.S. Multinationals’, The Journal of Business, 63(3), pp. 331–345. Available at: (Ac­cessed: 3 September 2013).

Kanagaraj, A. and Sikarwar, E. (2011) ‘A Firm Level Analysis of the Exchange Rate Exposure of Indian Firms’, Journal of Applied Finance & Banking, 1, pp. 163–184.

Kang, S., Kim, S. and Lee, J. W. (2016) ‘Reexamining the Exchange Rate Exposure Puzzle by Classifying Exchange Rate Risks into Two Types’, Global Economic Review, 45(2), pp. 116– 133. doi: 10.1080/1226508X.2015.1072730.

Kang, S. and Lee, J. W. (2011) ‘Estimating Korea’s Exchange Rate Exposure’, Asian Economic Journal, 25(2), pp. 177–196. doi: 10.1111/j.1467-8381.2011.02059.x.

Kim, J.-H. and Kim, J. (2015) ‘Financial Regulation, Exchange Rate Exposure, and Hedging Ac­tivities: Evidence from Korean Firms.’, Emerging Markets Finance & Trade, 51, pp. S152– S173. doi: 10.1080/1540496X.2014.998893.

Lee, S. et al., (2011) ‘Empirical Analysis of Employment and Foreign Direct Investment in Ma­laysia : An ARDL Bounds Testing Approach to Cointegration’, 1(3), pp. 77–91.

Lian, K. K. (1997) ‘Sectoral Beta forecasts of Securities in a Thin Capital Market: A case of Ma­laysia’, Jurnal Pengurusan, 16, pp. 13–32.

Lily, J. et al., (2014) ‘Exchange Rate Movement and Foreign Direct Investment in Asean Econo­mies’, Economics Research International, 2014(2), pp. 1–10. doi: 10.1155/2014/320949.

Lily, J. et al., (2018) ‘Exchange rate exposure revisited in Malaysia: a tale of two measures’, Eur­asian Business Review, 8(4), pp. 409–435. doi: 10.1007/s40821-017-0099-z.

Lim, K. P., Brooks, R. D. and Kim, J. H. (2008) ‘Financial crisis and stock market efficiency: Em­pirical evidence from Asian countries’, International Review of Financial Analysis, 17(3), pp. 571–591. doi: 10.1016/j.irfa.2007.03.001.

Lin, C.-H. (2012) ‘The comovement between exchange rates and stock prices in the Asian emerging markets’, International Review of Economics & Finance, 22(1), pp. 161–172. doi: 10.1016/j.iref.2011.09.006.

Lin, C. (2011) ‘Exchange rate exposure in the Asian emerging markets’, Journal of Multinational Financial Management, 21(4), pp. 224–238. doi: 10.1016/j.mulfin.2011.04.002.

Luiz, J., Júnior, R. and Rossi Júnior, J. L. (2012) ‘Understanding Brazilian companies’ foreign exchange exposure’, Emerging Markets Review, 13(3), pp. 352–365. doi: 10.1016/j.eme­mar.2012.03.007.149

Mirza, N. and Shabbir, G. (2005) ‘The death of CAPM: A critical review’, The Lahore Journal of Economics, 10(2), pp. 35–54. Available at:­stract_id=1519405.

Mohamad, S. and Nassir, A. M. (1994) ‘The Stability and Predictability of Betas : Evidence from the Kuala Lumpur Stock Exchange’, Pertanika Journal of Social Science and Humanities, 2(1), pp. 43–52.

Muller, A. and Verschoor, W. F. C. (2007) ‘Asian foreign exchange risk exposure’, Journal of the Japanese and International Economies, 21(1), pp. 16–37. doi: 10.1016/j.jjie.2006.06.001.

Narayan, P. K. (2005) ‘The saving and investment nexus for China: Evidence from cointegration tests’, Applied Economics, 37(17), pp. 1979–1990. doi: 10.1080/00036840500278103.

Nkoro, E. and Uko, A. K. (2016) ‘Autoregressive Distributed Lag ( ARDL ) cointegration tech­nique : application and interpretation’, Journal of Statistical and Econometric Methods, 5(4), pp. 63–91.

Parsley, D. C. and Popper, H. A. (2006) ‘Exchange rate pegs and foreign exchange exposure in East and South East Asia’, Journal of International Money and Finance, 25(6), pp. 992–1009. doi: 10.1016/j.jimonfin.2006.07.009.

Pasaribu, R. B. F. (2009) ‘Non-Synchronous Trading In Indonesia Stock Exchange’, Journal of Economics and Business, 3(2), pp. 81–89.

Pathirawasam, C. and Idirisinghe, I. (2011) ‘Market Efficiency, Thin Trading and Non-Linear Behaviour : Emerging Market Evidence from Sri Lanka’, Ekonomie a Management, 1, pp. 112–122.

Pesaran, M. H., Shin, Y. and Smith, R. J. (2001) ‘Bounds testing approaches to the analysis of level relationships’, Journal of Applied Econometrics, 16, pp. 289–326. doi: 10.1002/jae.616.

Phillips, P. and Perron, P. (1988) ‘Testing for a unit root in time series regression’, Biometrika, 75, pp. 335–346. doi: 10.1093/biomet/75.2.335.

Pierdzioch, C. and Kizys, R. (2010) ‘Sources of time-varying exchange rate exposure’, Internation­al Economics and Economic Policy, 7(4), pp. 371–390. doi: 10.1007/s10368-010-0147-y.

Priestley, R. and Ødegaard, B. A. (2007) ‘Linear and Nonlinear Exchange Rate Exposure’, Journal of International Money and Finance, 26, pp. 1016–1037. doi: 10.1016/j.jimonfin.2007.05.001.

Ray, S., Savin, N. E. and Tiwari, A. (2009) ‘Testing the CAPM revisited’, Journal of Empirical Fi­nance, 16(5), pp. 721–733. doi: 10.1016/j.jempfin.2009.07.006.

Saji, T. G. (2014) ‘Is CAPM Dead in Emerging Market? – Indian Evidence’, The IUP Journal of Financial Risk Management, 11(3), pp. 7–17.

Saptorini, I. and Swandari, F. (2012) ‘Koreksi Bias Beta Saham Di Bursa Efek Indonesia Periode 2009-2012’, Jurnal Wawasan Manajemen, 1(3), pp. 425–445.

Scholes, M. and Williams, J. (1977) ‘Estimating betas from nonsynchronous data’, Journal of Fi­nancial Economics, 5(3), pp. 309–327. doi: 10.1016/0304-405X(77)90041-1.

Schotman, P. C. and Zalewska, A. (2006) ‘Non-synchronous trading and testing for market inte­gration in Central European emerging markets’, Journal of Empirical Finance, 13(4–5), pp. 462–494. doi: 10.1016/j.jempfin.2006.04.002.

Sercu, P., Vandebroek, M. and Vinaimont, T. (2008) ‘Thin-Trading Effects in Beta: Bias v. Es­timation Error’, Journal of Business Finance & Accounting, 35(9–10), pp. 1196–1219. doi: 10.1111/j.1468-5957.2008.02110.x.150

Shih, Y.-C. et al., (2014) ‘The evolution of capital asset pricing models’, Review of Quantitative Fi­nance and Accounting, 42, pp. 415–448. doi: 10.1007/s11156-013-0348-x.

Sikarwar, E. (2014) ‘A Re-examination of Exchange Rate Exposure: Industry-level Analysis of Indian Firms’, Global Business Review, 15(4), pp. 867–882. doi: 10.1177/0972150914543416.

Sikarwar, E. (2020) ‘Forex interventions and exchange rate exposure: Evidence from emerging market firms’, Economic Modelling, 93(July), pp. 69–81. doi: 10.1016/j.econmod.2020.07.010.

Soetjiono, F., Murhadi, W. R. and Srnawati, E. (2013) ‘Bias Beta and Korelso Beta Dalam Bursa Efek Indonesia Periode 2009-2011’, Calyptra: Jurnal Ilmiah Mahasiswa Universitas Surabaya, 2(2), pp. 1–12.

Verschoor, W. F. C. and Muller, A. (2007) ‘The Asian crisis exchange risk exposure of US multi­nationals’, Managerial Finance, 33(9), pp. 710–740. doi: 10.1108/03074350710776253.

Ye, M., Hutson, E. and Muckley, C. (2014) ‘Exchange rate regimes and foreign exchange expo­sure: The case of emerging market firms’, Emerging Markets Review, 21, pp. 156–182. doi: 10.1016/j.ememar.2014.09.001.

Zubaidi, A., Hamizah, S. and Masih, A. M. M. (2009) ‘The stability of money demand in China : Evidence from the ARDL model’, 33, pp. 231–244. doi: 10.1016/j.ecosys.2009.06.001.


  • There are currently no refbacks.

Copyright (c) 2022 Gadjah Mada International Journal of Business

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.