Foreign exchange risk, the Malaysian experience

Foreign exchange rate risk has certain implications on the economic growth of a country. Such risk, measured by the volatility of exchange rates, is said to deter companies from engaging in international trade, reduce the profitability of firms (directly or indirectly) and discourage foreign direct investment inflows. The overall aim of this research is to analyse the impact of exchange rate risk or volatility on the Malaysian economy. The implications of exchange risk are substantiated by empirical studies on the impact of exchange rate volatility on Malaysia's trade balance and main categories of exports (primary trading partners only), on its market shares and on inward foreign direct investment from its main suppliers. Different forms of estimations have been conducted to establish these relationships including cointegration, Granger causality effects, impulse response, variance decomposition, vector error correction models and panel fixed effects. Two measures of exchange rate volatility have been used: the moving average standard deviations and the GARCH model. The overall results reveal that exchange rate volatility has inconsistent impacts on Malaysian economic factors. Exchange rate volatility is found to have a significant impact only on Malaysia's trade balance with the United States and Singapore. The major export categories are found to have a positive significant relationship with exchange rate volatility during the floating exchange rate period and a negative significant relationship during the fixed exchange rate period. The empirical results conclude that Malaysian stock prices lead exchange rate volatility. Aggregate inward foreign direct investment into Malaysia has a positive significant relationship, while disaggregate inward foreign direct investment has an insignificant positive relationship with exchange rate volatility.Foreign exchange rate risk has certain implications on the economic growth of a country. Such risk, measured by the volatility of exchange rates, is said to deter companies from engaging in international trade, reduce the profitability of firms (directly or indirectly) and discourage foreign direct investment inflows. The overall aim of this research is to analyse the impact of exchange rate risk or volatility on the Malaysian economy. The implications of exchange risk are substantiated by empirical studies on the impact of exchange rate volatility on Malaysia's trade balance and main categories of exports (primary trading partners only), on its market shares and on inward foreign direct investment from its main suppliers. Different forms of estimations have been conducted to establish these relationships including cointegration, Granger causality effects, impulse response, variance decomposition, vector error correction models and panel fixed effects. Two measures of exchange rate volatility have been used: the moving average standard deviations and the GARCH model. The overall results reveal that exchange rate volatility has inconsistent impacts on Malaysian economic factors. Exchange rate volatility is found to have a significant impact only on Malaysia's trade balance with the United States and Singapore. The major export categories are found to have a positive significant relationship with exchange rate volatility during the floating exchange rate period and a negative significant relationship during the fixed exchange rate period. The empirical results conclude that Malaysian stock prices lead exchange rate volatility. Aggregate inward foreign direct investment into Malaysia has a positive significant relationship, while disaggregate inward foreign direct investment has an insignificant positive relationship with exchange rate volatility