A.D. Martin International Review of Economics and Finance 9 2000 267–286 271
used since studies such as Choi, Elyasiani, and Kopecky 1992 and Madura and Zarruk 1995 find the exposure to actual and unanticipated interest rate changes to
be quite similar. Because of evidence that suggests actual exchange rate changes may obscure expo-
sure e.g., Choi, Elyasiani, and Kopecky, 1992, unanticipated exchange rate changes are also used in this study. More specifically, the mean unanticipated return in the
value of the domestic currency, measured in terms of the foreign currencies represented by the institutions in the sample, is used. The unanticipated return on the currency
of country j, X
jt
, is defined in Eq. 2 as: X
jt
5 A
X
jt
2 EX
jt
2 where
A X
jt
5 actual rate of change in the value of the domestic currency of country j relative to the foreign currency at week t; and
E X
jt
5 expected rate of change in the value of the domestic currency of coun- try j relative to the foreign currency at week t, where the expected rate
of change is based on the international Fisher effect IFE. The actual and expected rates of change are calculated relative to each of the 10
foreign currencies separately. The mean of these unanticipated exchange rate changes as well as the mean of actual exchange rate changes are ultimately used to represent
the exchange rate factor in Eq. 1.
4
The expected return is estimated according to IFE. Thus, EX
jt
is projected for each country j based on nominal interest rate differentials
5
between country j and each of the remaining 10 foreign countries:
E X
jt
5 1 1 I
jt
1 1 I
ft
3 where
I
jt
5 interest rate for domestic country j at week t; and
I
ft
5 interest rate for foreign country f at week t.
3. Results
Tables 2–11 present the regression coefficients that have been estimated by Eq. 1 for the key FX institutions and various portfolios. White’s 1980 test does not
detect heteroskedasticity to be pervasive.
6
However, autocorrelation is frequently detected. Therefore, when the Durbin-Watson D-W test indicates autocorrelation
may be present, a one-period lagged return, R
i ,t
2
1
, is included in Eq. 1. This adjustment corrects autocorrelation in every case.
Tables 2 through 5 present the coefficients for individual institutions. These tables differ by the exchange rate factor utilized in the estimation. Table 2 Table 3 reports
the coefficients when the exchange rate factor is represented by the unanticipated
272 A.D. Martin International Review of Economics and Finance 9 2000 267–286
Table 2 Individual exchange rate exposure estimates using unanticipated changes in the value of the domestic
currency Institution
b b
1
b
1lag
b
2
b
3
D-W Citibank
0.009 1.29
2 0.32
2 0.16
0.41 2.10
2.63 4.12
25.30 20.75
1.06 Chase Manhattan
0.007 1.33
— 0.04
0.29 2.19
2.27 5.15
0.20 0.93
HSBCMidland 0.001
1.18 —
2 0.16
2 0.00
1.93 0.58
5.88 21.70
20.01 Natl Westminster
0.001 1.08
2 0.23
2 0.15
2 0.17
1.96 0.45
5.26 24.51
21.50 20.79
JP Morgan 0.004
0.67 2
0.20 2
0.37 0.18
2.14 1.35
2.90 23.37
22.30 0.65
UBS 2
0.002 0.70
— 0.04
2 0.29
2.16 21.03
3.51 0.48
21.58 Barclay’s
0.004 0.99
2 0.28
0.04 2
0.18 1.93
1.65 5.04
25.28 0.38
20.86 BankAmerica
0.006 1.11
0.02 2
0.27 0.46
2.23 2.52
5.22 0.41
21.91 1.83
SBC 0.006
0.58 —
2 0.02
2 0.67
2.07 2.22
3.07 20.46
24.22 ABN AMRO
0.003 1.01
— 2
0.00 2
0.38 1.78
1.62 6.41
20.14 22.03
Credit Suisse 0.002
0.71 —
2 0.00
2 0.29
2.07 0.75
3.30 20.10
21.57 Std Chartered
0.005 1.03
2 0.21
2 0.18
2 0.37
1.91 1.38
3.24 23.54
21.24 21.12
SE Banken 0.012
1.37 —
2 0.01
1.69 2.06
3.28 4.94
20.06 6.33
RB Canada 0.005
0.81 2
0.18 2
0.06 0.55
2.14 2.23
4.41 23.29
21.00 3.23
Natl Australia 0.004
0.52 2
0.13 2
0.27 0.32
2.09 1.59
3.12 21.88
23.96 1.70
Tokyo-Mitsubishi 2
0.012 0.81
2 0.40
2 0.00
0.88 2.03
20.57 0.91
25.68 20.07
0.88 BNP
2 0.001
0.69 2
0.17 2
0.12 0.54
2.00 20.41
2.66 23.09
21.16 1.18
B of Montreal 0.004
0.91 2
0.19 0.01
0.39 1.93
1.68 4.94
23.50 0.20
2.28 Lloyd’s
0.006 0.82
2 0.28
0.05 0.02
1.97 2.00
3.55 24.67
0.43 0.10
Bankers Trust 2
0.000 1.03
— 0.01
2 0.00
2.11 20.13
4.29 0.08
20.01 Merrill Lynch
0.004 1.91
— 2
0.30 0.64
2.15 1.56
7.50 21.74
2.12 First Chicago
0.001 1.11
— 2
0.06 0.14
2.04 0.24
2.98 20.23
0.32 continued
A.D. Martin International Review of Economics and Finance 9 2000 267–286 273
Table 2 Continued
Institution b
b
1
b
1lag
b
2
b
3
D-W Societe Generale
2 0.003
0.63 —
2 0.10
2 0.25
2.03 21.06
3.02 21.30
20.71 Fuji
2 0.019
1.42 —
2 0.02
0.77 2.10
22.92 5.63
20.99 2.66
Commerzbank 2
0.001 0.46
— 2
0.28 0.52
1.89 20.40
3.26 24.20
2.56 RB Scotland
2 0.000
0.20 —
2 0.22
2 0.42
2.17 20.03
0.86 21.99
21.69 R
it
5 b
0i
1 b
1i
R
mt
1 b
2i
I
jt
1 b
3i
X
jt
1 m
it
is estimated with weekly data over the 1994–1996 period using SUR methodology. R
it
is the equity return for institution i. R
mt
is the return on the Dow Jones World Stock Index. I
jt
is the return on the nominal long-term interest rate for the associated country. X
jt
is the mean unanticipated change in the value of the associated domestic currency, where the anticipated
component is projected using IFE. A one-period lagged return, R
i ,t
2
1
, is included when it is necessary to correct autocorrelation. The coefficients are reported with t-values in parentheses.
significant at the 0.10 level; significant at the 0.05 level; significant at the 0.01 level. D-W is Durbin-Watson.
actual return on foreign currency per domestic currency, as previously described. Table 4 Table 5 reports the coefficients when the exchange rate factor is measured
as the unanticipated actual return on an equally weighted composite of the foreign currencies represented by the sample per U.S. dollar.
The results in Table 2 and Table 3 show that 11 of the 26 42 institutions are significantly exposed to exchange rate movements. Positive exposure is revealed for
8 institutions, indicating they have a net long position net of hedging in their domestic currencies, while negative exposure is revealed for 3 institutions. In general, institutions
that reveal significant exposure may be less risk averse and are attempting to achieve higher rates of return. The institutions that are not significantly exposed may be risk
averse and employ proficient FX personnel and internal control systems.
7
The specific institutions that are found to be significantly exposed does differ slightly between Table 2 and 3. In Table 2, only 2 of the 7 29 U.S. institutions are exposed,
while 9 of the 19 47 non-U.S. institutions are exposed. In Table 3, only 1 of the 7 14 U.S. institutions is exposed, while 10 of the 19 53 non-U.S. institutions
are exposed. Across both Tables 2 and 3, the exposure coefficients in absolute value terms range from 0.20 to 1.91 for the contemporaneous market risk, 0.00 to 0.37 for
interest rate risk, and 0.00 to 1.69 for exchange rate risk. The size of the coefficients helps assess the relative importance of these exposures for individual institutions. For
the majority of the cases, the absolute size of the contemporaneous market exposure coefficients b
1
is greatest, and the absolute size of the exchange rate exposure coefficients b
3
is greater than the interest rate exposure coefficients b
2
. The results in Table 4 indicate that 14 of 26 54 have significant exposure, and
the results in Table 5 indicate that 17 of 26 65 have significant exposure. Positive exposure is revealed for these institutions, indicating they have a net long position in
274 A.D. Martin International Review of Economics and Finance 9 2000 267–286
Table 3 Individual exchange rate exposure estimates using actual changes in the value of the domestic currency
Institution b
b
1
b
1lag
b
2
b
3
D-W Citibank
0.008 1.27
2 0.32
2 0.17
0.37 2.10
2.45 4.09
25.29 20.78
0.93 Chase Manhattan
0.006 1.31
— 0.03
0.19 2.19
2.09 5.10
0.15 0.58
HSBCMidland 0.001
1.17 —
2 0.16
0.04 1.94
0.63 5.83
21.73 0.20
Natl Westminster 0.002
1.10 2
0.23 2
0.14 2
0.24 1.97
0.87 5.32
24.55 21.50
21.12 JP Morgan
0.003 0.67
2 0.20
2 0.37
0.16 2.14
1.22 2.88
23.37 22.30
0.56 UBS
2 0.001
0.71 —
0.04 2
0.34 2.16
20.45 3.57
0.50 21.88
Barclay’s 0.005
1.01 2
0.28 0.04
2 0.26
1.93 2.22
5.12 25.32
0.44 21.24
BankAmerica 0.005
1.10 0.02
2 0.28
0.36 2.24
2.07 5.15
0.38 21.95
1.40 SBC
0.000 0.55
— 2
0.02 2
0.67 2.08
0.19 2.96
20.43 24.24
ABN AMRO 0.002
1.00 —
2 0.01
2 0.47
1.82 1.22
6.42 20.56
22.48 Credit Suisse
2 0.000
0.70 —
2 0.00
2 0.25
2.07 20.04
3.26 20.07
21.38 Std Chartered
0.007 1.03
2 0.21
2 0.19
2 0.34
1.90 2.00
3.23 23.52
21.28 21.05
SE Banken 2
0.002 1.35
— 2
0.01 1.63
2.04 20.51
4.89 20.11
6.09 RB Canada
0.003 0.79
2 0.17
2 0.05
0.54 2.15
1.43 4.31
23.11 20.97
3.13 Natl Australia
0.001 0.53
2 0.13
2 0.26
0.45 2.11
0.71 3.21
21.92 23.72
2.27 Tokyo-Mitsubishi
0.005 0.86
2 0.39
2 0.00
1.60 2.03
0.52 0.97
25.68 20.02
1.08 BNP
2 0.002
0.70 2
0.18 2
0.10 1.12
2.00 20.83
2.74 23.21
21.01 2.29
B of Montreal 0.002
0.90 2
0.19 0.01
0.39 1.94
1.12 4.87
23.39 0.21
2.22 Lloyd’s
0.006 0.81
2 0.28
0.05 0.08
1.97 2.10
3.50 24.69
0.42 0.33
Bankers Trust 2
0.000 1.04
— 0.03
0.14 2.13
20.12 4.35
0.15 0.47
Merrill Lynch 0.003
1.90 —
2 0.29
0.70 2.17
0.97 7.52
21.70 2.23
First Chicago 0.001
1.09 —
2 0.08
0.02 2.05
0.14 2.94
20.30 0.04
Societe Generale 2
0.002 0.64
— 2
0.09 0.17
2.02 20.85
3.13 21.12
0.45 continued
A.D. Martin International Review of Economics and Finance 9 2000 267–286 275
Table 3 Continued
Institution b
b
1
b
1lag
b
2
b
3
D-W Societe Generale
2 0.002
0.64 —
2 0.09
0.17 2.02
20.85 3.13
21.12 0.45
Fuji 2
0.003 1.46
— 2
0.02 1.13
2.12 21.03
5.80 20.81
2.64 Commerzbank
0.000 0.47
— 2
0.28 0.53
1.90 0.13
3.33 24.22
2.42 RB Scotland
0.002 0.20
— 2
0.23 2
0.39 2.16
0.75 0.86
22.01 21.58
R
it
5 b
0i
1 b
1i
R
mt
1 b
2i
I
jt
1 b
3i
X
jt
1 m
it
is estimated with weekly data over the 1994–1996 period using SUR methodology. R
it
is the equity return for institution i. R
mt
is the return on the Dow Jones World Stock Index. I
jt
is the return on the nominal long-term interest rate for the associated country. X
jt
is the actual change in the value of the associated domestic currency. A one-period lagged return, R
i ,t
2
1
, is included when it is necessary to correct autocorrelation. The coefficients are reported with t-values in
parentheses. significant at the 0.10 level; significant at the 0.05 level; significant at the 0.01 level. D-W is
Durbin-Watson.
the U.S. dollar. This result is consistent with previous studies that have also shown U.S. banks on average maintain net long U.S. dollar positions e.g., Choi, Elyasiani,
Kopecky, 1992; Chamberlain, Howe, Popper, 1997. Although, Choi and Elyasiani 1997 find a substantial number of the largest U.S. banks have net short U.S. dollar
positions.
Across both Tables 4 and 5, only 1 of the 7 14 U.S. institutions is exposed, while 13 of the 19 68 non-U.S. institutions in Table 4 and 16 of the 19 84
non-U.S. institutions in Table 5 are exposed. In absolute value terms, the exposure coefficients range from 0.12 to 1.91 for the contemporaneous market risk, 0.00 to 0.38
for interest rate risk, and 0.08 to 1.28 for exchange rate risk. Again, the majority of the cases show the size of the contemporaneous market exposure coefficients b
1
is greatest, and the absolute size of the exchange rate exposure coefficients b
3
is greater than the interest rate exposure coefficients b
2
. Choi and Elyasiani 1997 also find a great proportion of U.S. banks to be signifi-
cantly exposed. There are some differences in results that may arise because of differ- ences in the sample andor sample period. Choi and Elyasiani 1997 study U.S. banks,
whereas this study focuses on the key global financial institutions that are heavily involved in the FX market. As Choi and Elyasiani 1997 indicate, U.S. banks use
derivatives for hedging purposes. The U.S. financial institutions in the current study may not reveal significant exposure if they effectively utilized derivatives to manage
their risk during the examination period.
Tables 6 through 9 present the coefficients for country-specific portfolios. Table 6 Table 7 details the results when unanticipated actual changes in multilateral exchange
rates are used. Table 8 Table 9 details the results when unanticipated actual changes in bilateral exchange rates are used. In Tables 6 and 7, equally weighted country-specific
276 A.D. Martin International Review of Economics and Finance 9 2000 267–286
Table 4 Individual exchange rate exposure estimates using unanticipated changes in the value of the U.S. dollar
Institution b
b
1
b
1lag
b
2
b
3
D-W Citibank
0.009 1.30
2 0.31
2 0.15
0.39 2.12
2.58 4.17
25.14 20.69
0.98 Chase Manhattan
0.006 1.33
— 0.04
0.27 2.19
2.22 5.16
0.23 0.82
HSBCMidland 0.004
1.22 —
2 0.15
0.74 1.83
1.62 6.30
21.65 2.76
Natl Westminster 0.005
1.17 2
0.10 2
0.10 0.87
2.32 1.89
5.73 22.80
21.04 3.10
JP Morgan 0.003
0.66 2
0.20 2
0.38 0.12
2.14 1.27
2.85 23.30
22.34 0.41
UBS 0.000
0.67 —
0.02 0.39
2.16 0.06
3.35 0.21
1.40 Barclay’s
0.007 1.02
2 0.28
0.06 0.82
1.97 3.12
5.38 24.47
0.65 3.14
BankAmerica 0.006
1.10 0.02
2 0.27
0.30 2.23
2.29 5.16
0.36 21.95
1.10 SBC
0.004 0.64
— 2
0.01 1.13
2.03 1.73
3.42 20.24
4.38 ABN AMRO
0.003 1.04
0.16 2
0.01 0.51
1.97 1.56
6.57 2.46
20.78 2.31
Credit Suisse 0.002
0.74 —
0.00 0.68
1.98 0.79
3.49 0.01
2.30 Std Chartered
0.009 1.07
— 2
0.18 1.16
2.22 2.45
3.43 21.25
2.72 SE Banken
0.001 1.38
— 2
0.06 0.52
2.02 0.37
4.62 20.46
1.25 RB Canada
0.003 0.84
2 0.07
2 0.04
0.25 2.29
1.39 4.49
21.54 20.69
0.97 Natl Australia
0.002 0.53
2 0.12
2 0.26
0.35 2.10
1.21 3.17
21.88 23.78
1.65 Tokyo-Mitsubishi
0.009 0.88
2 0.39
0.01 1.28
2.07 0.80
0.99 25.69
0.18 1.04
BNP 0.001
0.72 2
0.17 2
0.13 1.04
2.00 0.24
2.82 23.15
21.24 2.90
B of Montreal 0.003
0.97 —
0.04 0.35
2.21 1.18
5.16 0.63
1.32 Lloyd’s
0.008 0.87
2 0.24
0.06 0.67
2.00 2.73
3.87 24.27
0.59 2.21
Bankers Trust 2
0.001 1.02
— 0.00
2 0.08
2.10 20.22
4.24 0.02
20.24 Merrill Lynch
0.005 1.91
— 2
0.29 0.71
2.14 1.62
7.52 21.71
2.18 First Chicago
0.002 1.15
— 2
0.00 0.36
2.03 0.40
3.10 20.01
0.75 continued
A.D. Martin International Review of Economics and Finance 9 2000 267–286 277
Table 4 Continued
Institution b
b
1
b
1lag
b
2
b
3
D-W Societe Generale
2 0.000
0.68 —
2 0.10
0.53 2.02
20.13 3.23
21.22 1.84
Fuji 2
0.000 1.49
— 2
0.01 0.99
2.18 20.11
6.03 20.51
2.88 Commerzbank
0.002 0.48
— 2
0.28 0.48
1.86 0.96
3.39 24.11
2.51 RB Scotland
0.000 0.12
— 2
0.22 2
0.44 2.14
0.14 0.50
22.01 21.35
R
it
5 b
0i
1 b
1i
R
mt
1 b
2i
I
jt
1 b
3i
X
t
1 m
it
is estimated with weekly data over the 1994–1996 period using SUR methodology. R
it
is the equity return for institution i. R
mt
is the return on the Dow Jones World Stock Index. I
jt
is the return on the nominal long-term interest rate for the associated country. X
jt
is the mean unanticipated change in the value of the U.S. dollar, where the anticipated component is projected
using IFE. A one-period lagged return, R
i ,t
2
1
, is included when it is necessary to correct autocorrelation. The coefficients are reported with t-values in parentheses.
significant at the 0.10 level; significant at the 0.05 level; significant at the 0.01 level. D-W is Durbin-Watson.
portfolios are constructed for those countries that have at least three institutions in the top 30 list of FX participants see Table 1. The remaining institutions are placed in an
equally weighted All Others portfolio. The estimates in Panel A of Table 6 Table 7 use the unanticipated actual return on the equally weighted composite of foreign
currencies per domestic currency, except the estimates for the All Others portfolio use the unanticipated actual return on the equally weighted composite of foreign currencies
per U.S. dollar. The estimates in Panel B of Table 6 Table 7 use the unanticipated actual return on the equally weighted composite of foreign currencies per U.S. dollar.
The results in Panel A of Tables 6 and 7 do not indicate that the country-specific portfolios are exposed to currency movements. Only the exposure of the Switzerland
portfolio is marginally significant in Panel A of Table 7. In Panel B of Tables 6 and 7, the U.K. and Switzerland portfolios are shown to be significantly exposed to
movements in the value of the U.S. dollar. In both panels of both tables, the All Others portfolio is significantly exposed.
Table 8 Table 9 presents the exposure estimates of country-specific portfolios to the unanticipated actual change in three bilateral exchange rates: DM in Panel A,
¥ in Panel B, and £ in Panel C. The composition of these country-specific portfolios differ from those used in Tables 6 and 7 in that only the top 10 key traders of the
corresponding currency pair are included. Equally weighted country-specific portfolios are constructed for countries with at least three institutions in the top 10 list of key
traders identified by Euromoney. Note that Sumitomo and Industrial Bank of Japan are considered to be key ¥ traders but are not in the top 30 list of FX participants.
Across all three panels in both Tables 8 and 9, the U.S. portfolio does not reveal significant exposure. In Table 8, all the non-U.S. country-specific portfolios and All
Others portfolios reveal significant exposure to the three bilateral rates. In Table 9,
278 A.D. Martin International Review of Economics and Finance 9 2000 267–286
Table 5 Individual exchange rate exposure estimates using actual changes in the value of the U.S. dollar
Institution b
b
1
b
1lag
b
2
b
3
D-W Citibank
0.008 1.28
2 0.31
2 0.16
0.46 2.12
2.44 4.13
25.19 20.74
1.14 Chase Manhattan
0.006 1.32
— 0.04
0.28 2.19
2.09 5.14
0.21 0.83
HSBCMidland 0.002
1.21 —
2 0.14
0.96 1.86
0.81 6.38
21.56 3.59
Natl Westminster 0.002
1.08 2
0.23 2
0.13 0.74
1.93 0.95
5.44 24.57
21.39 2.63
JP Morgan 0.003
0.67 2
0.20 2
0.37 0.22
2.15 1.23
2.88 23.32
22.29 0.73
UBS 2
0.001 0.66
— 0.02
0.39 2.16
20.44 3.30
0.19 1.36
Barclay’s 0.005
1.00 2
0.27 0.06
0.84 1.88
2.34 5.29
25.17 0.66
3.15 BankAmerica
0.005 1.10
0.02 2
0.27 0.36
2.23 2.08
5.16 0.36
21.92 1.27
SBC 0.001
0.61 —
2 0.01
1.27 2.07
0.33 3.36
20.18 4.91
ABN AMRO 0.002
1.01 —
2 0.01
0.72 1.80
1.27 6.47
20.68 3.23
Credit Suisse 0.000
0.73 —
2 0.00
0.83 2.00
0.06 3.46
20.01 2.77
Std Chartered 0.008
1.01 2
0.22 2
0.17 1.22
1.89 2.15
3.31 23.71
21.18 2.83
SE Banken 2
0.000 1.37
— 2
0.06 0.81
2.06 20.02
4.65 20.51
1.90 RB Canada
0.003 0.84
2 0.16
2 0.05
0.46 2.14
1.33 4.53
22.85 20.91
1.75 Natl Australia
0.001 0.53
2 0.13
2 0.26
0.44 2.11
0.74 3.18
21.91 23.66
2.03 Tokyo-Mitsubishi
0.005 0.84
2 0.39
2 0.00
0.76 2.05
0.47 0.95
25.76 20.01
0.61 BNP
2 0.002
0.70 2
0.17 2
0.12 1.08
2.01 20.77
2.74 23.14
21.17 2.95
B of Montreal 0.002
0.94 2
0.17 0.01
0.54 1.93
1.10 5.10
23.19 0.21
2.05 Lloyd’s
0.006 0.85
2 0.30
0.07 0.85
1.94 2.32
3.81 25.16
0.66 2.71
Bankers Trust 2
0.000 1.04
— 0.03
0.12 2.12
20.13 4.35
0.16 0.38
Merrill Lynch 0.003
1.91 —
2 0.28
0.87 2.16
0.99 7.57
21.65 2.61
First Chicago 0.001
1.13 —
2 0.03
0.32 2.04
0.16 3.04
20.12 0.66
continued
A.D. Martin International Review of Economics and Finance 9 2000 267–286 279
Table 5 Continued
Institution b
b
1
b
1lag
b
2
b
3
D-W Societe Generale
2 0.002
0.66 —
2 0.09
0.59 2.03
20.78 3.19
21.16 1.99
Fuji 2
0.003 1.49
— 2
0.01 0.88
2.15 21.14
5.89 20.69
2.49 Commerzbank
0.000 0.47
— 2
0.28 0.56
1.87 0.15
3.34 24.18
2.87 RB Scotland
0.002 0.13
— 2
0.22 2
0.38 2.14
0.64- 0.56
21.99 21.15
R
it
5 b
0i
1 b
1i
R
mt
1 b
2i
I
jt
1 b
3i
X
t
1 m
it
is estimated with weekly data over the 1994–1996 period using SUR methodology. R
it
is the equity return for institution i. R
mt
is the return on the Dow Jones World Stock Index. I
jt
is the return on the nominal long-term interest rate for the associated country. X
t
is the actual change in the value of the U.S. dollar. A one-period lagged return, R
i ,t
2
1
, is included when it is necessary to correct autocorrelation. The coefficients are reported with t-values in parentheses.
significant at the 0.10 level; significant at the 0.05 level; significant at the 0.01 level. D-W is Durbin-Watson.
only the All Others portfolios are shown to be significantly exposed to the German mark and Japanese yen.
For the country-specific portfolios, the magnitude of the exposure coefficients is clearly greatest for market risk in Tables 6 through 9. However, it is not as clear
whether exchange rate exposure or interest rate exposure is relatively more important. These results also hold for the global portfolios that are analyzed in Tables 10 and
11 and are yet to be discussed.
The U.S. portfolio in Tables 6 through 9 is consistently found to be insignificantly exposed, whereas the non-U.S. country-specific portfolios are often found to be signifi-
cantly exposed. These findings may be attributed to differing regulatory and supervi- sory requirements e.g., Chamberlain, Howe, Popper, 1997. Under the auspices
of ensuring the safety and soundness of the U.S. banking system, the U.S. government may be more restrictive when compared to most other countries Barth, Nolle,
Rice, 1997.
8
Considering the threat of financial systems crises across the world and previous experiences with the U.S. financial system crisis, it is also possible that U.S.
FX institutions as a whole are more reluctant to accept exchange rate risk than their global competitors.
The exposure of various global portfolios to the unanticipated actual change in a multilateral exchange rate and three different bilateral rates are reported in Table
10 Table 11.
9
The estimates for the Market Share portfolios, which are market share- weighted portfolios, are provided in Panel A in both Tables 10 and 11. Different
Market Share portfolios are constructed depending on the nature of the exposure being estimated. More specifically, the Market Share portfolio used to assess the
exposure to the multilateral exchange rate factor is constructed using the key FX institutions and market share figures detailed in Table 1. The Market Share portfolios
280 A.D. Martin International Review of Economics and Finance 9 2000 267–286
Table 6 Exposure of country portfolios to unanticipated changes in multilateral exchange rates
b b
1
b
1lag
b
2
b
3
D-W Panel A
Portfolio U.S.
0.004 1.15
2 0.13
2 0.24
0.22 1.98
2.25 6.65
21.95 21.93
1.02 U.K.
0.003 0.80
2 0.15
2 0.15
2 0.13
2.00 1.59
4.81 21.96
21.72 20.68
Switzerland 0.002
0.62 —
2 0.05
2 0.25
2.14 0.75
3.88 21.32
21.57 All Others
0.002 0.81
2 0.16
2 0.17
0.53 2.04
1.97 8.31
22.82 22.44
4.21 Panel B
Portfolio U.S.
0.004 1.16
2 0.13
2 0.24
0.25 1.99
2.29 6.68
21.93 21.90
1.15 U.K.
0.005 0.85
— 2
0.13 0.64
2.21 2.69
5.23 21.57
2.89 Switzerland
0.002 0.66
— 2
0.04 0.74
2.05 1.09
4.20 21.23
3.37 All Others
0.003 0.81
2 0.17
2 0.17
0.63 2.01
2.23 8.37
22.93 22.46
4.72 R
it
5 b
0i
1 b
1i
R
mt
1 b
2i
I
jt
1 b
3i
X
jt
1 m
it
is estimated with weekly data over the 1994–1996 period using SUR methodology. R
it
is the equity return for portfolio i. R
mt
is the return on the Dow Jones World Stock Index. I
jt
is the return on the nominal long-term interest rate for the associated country, except the All Others portfolio uses an equally weighted interest rate index. In Panel A, X
jt
is the mean unanticipated change in the value of the associated domestic currency, except the All Others portfolio
uses the value of the U.S. dollar. In Panel B, X
jt
is the unanticipated change in the value of the U.S. dollar. The anticipated returns are projected using IFE. A one-period lagged return, R
i ,t
2
1
, is included when it is necessary to correct autocorrelation. The coefficients are reported with t-values in parentheses.
significant at the 0.10 level; significant at the 0.05 level; significant at the 0.01 level. D-W is Durbin-Watson.
used to assess the exposure to the three bilateral rates are constructed using the key traders of the associated currency pair as reported by Euromoney. Numerical scores
are provided instead of market share estimates for the key traders of these currency pairs. Thus, these portfolios are pseudo-market share-weighted. The estimates for the
Global Index, which is a global composite consisting of approximately 50 major money center banks from 17 countries are provided in Panel B in Tables 10 and 11. This
market capitalization-weighted index is constructed by Dow Jones.
The Market Share portfolios in Panel A of Tables 10 and 11 are found to be significantly exposed to the multilateral exchange rate and the three bilateral rates.
However, the Global Index in Panel B of Tables 10 and 11 does not reveal significant exposure to the multilateral exchange rate or the three bilateral rates. The Global
Index is likely to be more comprehensive than the Market Share portfolios that include, at most, 26 key FX participants or 68 of the FX market. To the extent that
A.D. Martin International Review of Economics and Finance 9 2000 267–286 281
Table 7 Exposure of country portfolios to actual changes in multilateral exchange rates
b b
1
b
1lag
b
2
b
3
D-W Panel A
Portfolio U.S.
0.004 1.16
2 0.13
2 0.23
0.31 1.99
2.07 6.70
21.98 21.85
1.40 U.K.
0.004 0.80
2 0.15
2 0.15
2 0.11
2.00 2.08
4.78 21.95
21.73 20.55
Switzerland 0.000
0.61 —
2 0.05
2 0.28
2.15 20.13
3.83 21.30
21.78 All Others
0.001 0.80
2 0.17
2 0.16
0.64 2.07
0.73 8.46
23.05 22.31
5.01 Panel B
Portfolio U.S.
0.004 1.16
2 0.13
2 0.23
0.34 2.00
2.07 6.72
21.95 21.82
1.50 U.K.
0.003 0.84
— 2
0.13 0.68
2.22 1.88
5.18 21.46
3.02 Switzerland
0.000 0.65
— 2
0.04 0.83
2.07 20.01
4.15 21.16
3.75 All Others
0.001 0.80
2 0.18
2 0.16
0.73 2.05
0.76 8.50
23.16 22.32
5.49 R
it
5 b
0i
1 b
1i
R
mt
1 b
2i
I
jt
1 b
3i
X
jt
1 m
it
is estimated with weekly data over the 1994–1996 period using SUR methodology. R
it
is the equity return for portfolio i. R
mt
is the return on the Dow Jones World Stock Index. I
it
is the return on the nominal long-term interest rate for the associated country, except the All Others portfolio uses an equally weighted interest rate index. In Panel A, X
jt
is the actual change in the value of the associated domestic currency, except the All Others portfolio uses the value of the
U.S. dollar. In Panel B, X
jt
is the actual change in the value of the U.S. dollar. A one-period lagged return, R
i ,t
2
1
, is included when it is necessary to correct autocorrelation. The coefficients are reported with t-values in parentheses.
significant at the 0.10 level; significant at the 0.05 level; significant at the 0.01 level. D-W is Durbin-Watson.
the 50 major global money center banks that constitute this index represent a greater proportion of the FX market, there is some evidence that exchange rate exposure
does not exist on a global basis.
4. Conclusion
