Despite the best efforts of economists, a basic paradox as to the impact of exchange rate volatility on trade flows remains unresolved at both the theoretical and empirical level. This paper surveys the vast literature in the area in an attempt to identify major issues which have contributed to the development of the debate and examine whether any general direction for consensus may be found.

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This paper mvestigates three techniques for the estimation of conditional llmedependent betas: (a) a multivariate generalised ARCH approach; (b) a tlmevarymg beta market model approach suggested by Schwert and Seguin (1990); and (c) the Kalman filter technique. These approaches are applied to a sample of returns on Australian industry portfolIOs over the perIOd 1974-1996. The evidence found in this paper, based on in-sample forecast errors, overwhelmingly supports the Kalman filter approach When out-of-sample forecasts are considered the evidence again finds in favour of the Kalman filter approach.

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