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Exchange Rate and Interest Rate Exposure of UK Industries Using First-order Autoregressive Exponential GARCH-in-mean (EGARCH-M) Approach

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Abstract

We examine the sensitivity of 31 UK non-financial industries to exchange and interest rate exposure from 1990 to 2006 using first-order autoregressive exponential GARCH-in-mean (EGARCH-M) model. We find that the stock returns of UK industries are more affected by long-term interest rate risk than exchange rate risk and short-term interest rate risk. Moreover, the euro introduction decreases exchange and interest rate exposure and competitive industries exhibit higher returns volatility than concentrated industries. Furthermore, for most UK industries: increased risk does not necessarily lead to an increase in returns and persistence of volatility is much higher in some industries than others.

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