New estimates of time-varying currency betas: A trivariate BEKK approach

•The first study estimating the time-varying currency betas using trivariate BEKK-GARCH-M model with most updated dataset•Time-varying currency betas generally more volatile than world market betas•Currency betas in emerging markets more volatile than those in developed markets•Evidence of long-memory in the estimated currency betas and mean-reverting•Demonstrated usefulness of the time-varying exposures in strategic investment

This paper examines the conditional time-varying currency betas from five developed markets and four emerging markets. We employ a modified trivariate BEKK-GARCH-in-mean model of Engle and Kroner (1995) to estimate the time-varying conditional variance and covariance of returns of stock index, the world market portfolio and changes in bilateral exchange rate between the US dollar and the local currency. It is found that currency betas are more volatile than those of the world market betas. Currency betas in emerging markets are more volatile than those in the developed markets. Moreover, we find evidence of long-memory in currency betas. The usefulness of time-varying currency betas are illustrated by two applications.