Skip to main content
×
Home
    • Aa
    • Aa

Does Emerging Market Exchange Risk Affect Global Equity Prices?

  • Francesca Carrieri (a1), Vihang Errunza (a2) and Basma Majerbi (a3)
Abstract
Abstract

This paper conducts empirical tests in a conditional setting for 10 developed and 12 emerging markets to determine whether emerging market currency risk is priced and if it spills over into developed market assets. Our empirical model is based on real exchange rate measures and it allows currency risk to compete with broader economic and political risks. We find that emerging market currency risk is priced separately from other local risk factors and that it represents a significant component of equity returns in both developed and emerging markets. We also find that the spillover impact is heightened during emerging market crisis episodes and affects the expected compensation for global risks.

Copyright
References
Hide All
Adler M., and Dumas B.. “International Portfolio Choice and Corporation Finance: A Synthesis.” Journal of Finance, 38 (1983), 925984.
Bailey W.; Chan K.; and Chung Y. P.. “Depositary Receipts, Country Funds and the Peso Crash: The Intraday Evidence.” Journal of Finance, 55 (2000), 26932717.
Bailey W., and Chung Y. P.. “Exchange Rate Fluctuations, Political Risk and Stock Returns: Some Evidence from an Emerging Market.” Journal of Financial and Quantitative Analysis, 30 (1995), 541560.
Bekaert G., and Harvey C. R.. “Time Varying World Market Integration.” Journal of Finance, 50 (1995), 403444.
Berndt E. K.; Hall B. H.; Hall R.; and Hausman J.. “Estimation and Inference in Nonlinear Structural Models.” Annals of Economics and Social Measurement, 3 (1974), 653665.
Brennan M., and Cao H.. “International Portfolio Investment Flows.” Journal of Finance, 52 (1997), 18511880.
Calvo G., and Mendoza E.. “Rational Contagion and the Globalization of the Securities Markets.” Journal of International Economics, 51 (2000), 79113.
Carrieri F. “The Effects of Liberalization on Market and Currency Risk in the EU.” European Financial Management, 7 (2001), 259290.
Carrieri F.; Errunza V.; and Hogan K.. “Characterizing World Market Integration through Time.” Journal of Financial and Quantitative Analysis (forthcoming).
Carrieri F.; Errunza V.; and Majerbi B.. “Local Risk Factors in Emerging Markets: Are They Separately Priced?Journal of Empirical Finance (forthcoming 2006).
Chan K. C.; Karolyi G. A.; and Stulz R. M.. “Global Financial Markets and the Risk Premium on U.S. Equity.” Journal of Financial Economics, 32 (1992), 137167.
Choi J. J.; Hiraki T.; and Takezawa N.. “Is Foreign Exchange Risk Priced in the Japanese Stock Market?Journal of Financial and Quantitative Analysis, 33 (1998), 361382.
Choi J. J., and Rajan M.. “A Joint Test of Market Segmentation and Exchange Risk Factor in International Capital Markets.” Journal of International Business Studies, 28 (1997), 2949.
De Santis G., and Gerard B.. “International Asset Pricing and Portfolio Diversification with Time-Varying Risk.” Journal of Finance, 52 (1997), 18811912.
De Santis G., and Gerard B.. “How Big is the Premium for Currency Risk?Journal of Financial Economics, 49 (1998), 375412.
De Santis G., and Imrohoroglu S.. “Stock Returns and Volatility in Emerging Financial Markets.” Journal of International Money and Finance, 16 (1997), 561579.
Doukas J.; Hall P.; and Lang L.. “The Pricing of Currency Risk in Japan.” Journal of Banking and Finance, 23 (1999), 120.
Dumas B. “A Test of the International CAPM Using Business Cycles Indicators as Instrumental Variables.” In The Internationalization of Securities Markets, Frankel J. A., ed., Chicago, IL: Univ. of Chicago Press (1994).
Dumas B., and Solnik B.. “The World Price of Foreign Exchange Risk.” Journal of Finance, 50 (1995), 445479.
Eichengreen B.; Rose A. K.; and Wyplosz C.. “Contagious Currency Crises: First Tests.” Scandinavian Journal of Economics, 98 (1996), 463484.
Engel R. F., and Ng V. K.. “Measuring and Testing the Impact of News and Volatility.” Journal of Finance, 48 (1993), 17491778.
Errunza V.; Losq E.; and Padmanabhan P.. “Tests of Integration, Mild Segmentation and Segmentation Hypothesis.” Journal of Banking and Finance, 40 (1992), 105124.
Eun C., and Shim S.. “International Transmission of Stock Market Movements.” Journal of Financial and Quantitative Analysis, 24 (1989), 241256.
Ferson W., and Harvey C. R.. “The Risk and Predictability of International Equity Returns.” Review of Financial Studies, 6 (1993), 527566.
Ferson W. E., and Harvey C. R.. “Sources of Risk and Expected Returns in Global Equity Markets.” Journal of Banking and Finance, 18 (1994), 775803.
Girton L., and Roper D.. “A Monetary Model of Exchange Market Pressure Applied to Postwar Canadian Experience.” American Economic Review, 67 (1977), 537548.
Hamao Y.An Empirical Examination of Arbitrage Pricing Theory Using Japanese Data.” Japan and the World Economy, 1 (1988), 4561.
Hamao Y.; Masulis R.; and Ng V.. “Correlations of Price Changes and Volatility across International Stock Markets.” Review of Financial Studies, 3 (1990), 281308.
Hardouvelis G.; Malliaropoulos D.; and Priestley R.. “EMU and Stock Market Integration.” Journal of Business, 79 (2006), 365392.
Jorion P.The Pricing of Exchange Rate Risk in the Stock Market.” Journal of Financial and Quantitative Analysis, 26 (1991), 361376.
Kaminsky G., and Reinhart C.. “The Twin Crises: the Causes of Banking and Balance of Payments Problems.” American Economic Review, 89 (1999), 473500.
Karolyi A., and Stulz R. M.. “Are Financial Assets Priced Locally or Globally?” In The Handbook of the Economics of Finance, Constantinides G., Harris M., and Stulz R. (eds). Amsterdam: North Holland (2003).
Masson P.Contagion.” Journal of International Money and Finance, 18 (1999), 587602.
Sachs J. D.; Tornell A.; and Velasco A.. “Financial Crises in Emerging Markets: The Lessons from 1995.” Brookings Papers on Economic Activity, 1 (1996), 147215.
Sarkissian S.The Cross-Country Consumption Dispersion and the World Business Cycle.” Working Paper, McGill Univ. (2003).
Shanno D. F.On Broyden-Fletcher-Goldfarb-Shanno Method.” Journal of Optimization Theory and Applications, 46 (1985), 8794.
Solnik B.An Equilibrium Model of the International Capital Market.” Journal of Economic Theory, 8 (1974), 500524.
Stulz R. M.A Model of International Asset Pricing.” Journal of Financial Economics, 9 (1981), 383406.
White H.Maximum Likelihood Estimation of Misspecified Models.” Econometrica, 50 (1982), 125.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 36 *
Loading metrics...

Abstract views

Total abstract views: 160 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 20th October 2017. This data will be updated every 24 hours.