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Exchange rate risk and the bilateral trade between Malaysia and Singapore

Muhammad Aftab (Department of Management Sciences, COMSATS Institute of Information Technology, Islamabad, Pakistan and Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia)
Ijaz Ur Rehman (Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia and College of Business Administration, Al Falah University, Dubai, United Arab Emirates)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 7 August 2017

Abstract

Purpose

This paper aims to examine the influence of exchange rate risk on the bilateral trade of two closely connected East Asian open economies – Malaysia and Singapore – at industry level.

Design/methodology/approach

This study estimates import and export demand models considering 65 import and 65 export industries of Malaysia, with Singapore using monthly data over the period 2000-2014. Generalized Auto Regressive Conditional Heteroskedasticity (GARCH) model is used to measure the exchange rate risk, and autoregressive distributed lag (ARDL) approach to co-integration is used to examine the study empirical models.

Findings

The findings suggest that exchange risk has an impact on a moderate number of industries in the short run; however, this influence endures in very few industries in the long run. It is interesting to note that exchange rate volatility expedites import demand for the large Malaysian import industries like gas and plastic.

Originality/value

No prior study has explored the topic at industry level focusing on the bilateral trade flows between Malaysia and Singapore. This research serves important implications while thinking about exchange rate risk and trade linkage in a case of open economies trade pairs that are highly integrated in presence of a variety of bilateral trade agreements and economic groupings.

Keywords

Citation

Aftab, M. and Rehman, I.U. (2017), "Exchange rate risk and the bilateral trade between Malaysia and Singapore", Studies in Economics and Finance, Vol. 34 No. 3, pp. 407-426. https://doi.org/10.1108/SEF-08-2015-0188

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited