Evidence for Sign Asymmetry of Exchange Rate Exposure

Abstract

This paper attempts to find evidence for sign asymmetry of exchange rate exposure. An extended classification of the sources of asymmetry has been introduced in place of somewhat incomplete classification suggested by previous studies. In addition, a new measure is suggested in order to estimate the overall impact of incorporating sign asymmetry. The study results in several important findings: (a) there is evidence for the presence of sign asymmetry; (b) as it can work in either direction, it is not appropriate to make generalizations like incorporating sign asymmetry always leading to more/less exchange rate exposure; and (c) the exposure coefficients estimated by the models that do not capture sign asymmetry are likely to under/overestimate the exposure to exchange rate risk