Hostname: page-component-76fb5796d-dfsvx Total loading time: 0 Render date: 2024-04-29T00:13:36.643Z Has data issue: false hasContentIssue false
  • English
  • Français

Exchange Rate Fluctuations, Political Risk, and Stock Returns: Some Evidence from an Emerging Market

Published online by Cambridge University Press:  06 April 2009

Warren Bailey  and
Y. Peter Chung
Warren Bailey
Affiliation:
Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853-4201
Y. Peter Chung
Affiliation:
A. Gary Anderson Graduate School of Management, University of California, Riverside, CA 92521
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the impact of exchange rate fluctuations and political risk on the risk premiums reflected in cross-sections of individual equity returns from Mexico, a country that has experienced significant monetary and political turbulence. Indicators from Mexico's currency and sovereign debt markets are employed as proxies for exchange rate and political risks. We find some evidence of equity market premiums for exposure to these risks. The results suggest common factors in emerging market equity, currency, and sovereign debt markets, and have several implications for corporate and portfolio management and for the use of emerging market data by researchers.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 4 , December 1995 , pp. 541 - 561
Copyright
Copyright © School of Business Administration, University of Washington 1995

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adler, M., and Dumas, B.. “International Portfolio Choice and Corporation Finance: A Synthesis.” Journal of Finance, 38 (06 1983), 925–984.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Time-Varying World Market Integration.” Journal of Finance, 50 (06 1995), 403–444.Google Scholar
Bekaert, G., and Hodrick, R. J.. “Characterizing Predictable Components in Excess Returns in Equity and Foreign Exchange Markets.” Journal of Finance, 47 (06 1992), 467–509.CrossRefGoogle Scholar
Bonser-Neal, C.; Brauer, G.; Neal, R.; and Wheatley, S.. “Closed End Country Fund Prices and International Investment Restrictions.” Journal of Finance, 45 (06 1990), 523–548.Google Scholar
Brown, S. J., and Otsuki, T.. “Macroeconomic Factors and the Japanese Equity Markets: The CAPMD Project.” In Japanese Capital Markets, Elton, E. J. and Gruber, M. J., eds. New York, NY: Harper and Row (1990), 175–192.Google Scholar
Brown, S. J., and Otsuki, T.. “RiskPremia in Pacific Basin Capital Markets.” Pacific Basin Finance Journal, 1 (09 1993), 235–262.CrossRefGoogle Scholar
Chen, N.-F; Roll, R.; and Ross, S. A.. “Economic Forces and the Stock Market.” Journal of Business, 59 (07 1986), 383–404.CrossRefGoogle Scholar
Domowitz, I.; Glen, J.; and Madhavan, A.. “International Cross-Listing, Market Quality, and Ownership Rights: An Analysis of the Mexican Stock Market.” Working Paper, Univ. of Southern California (June 1994).Google Scholar
Edwards, S. “LDC Foreign Borrowing and Default Risk: An Empirical Investigation.” American Economic Review, 74 (09 1984), 726–734.Google Scholar
Fama, E. F. “Forward and Spot Exchange Rates.” Journal of Monetary Economics, 14 (11 1984), 319–338.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Business Conditions and Expected Returns on Stocks and Bonds.” Journal of Financial Economics, 25 (11 1989), 23–50.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J.. “Risk, Return, and Equilibrium: Empirical Test.” Journal of Political Economy, 38 (05/06 1973), 607–636.CrossRefGoogle Scholar
Ferson, W. E. “Are the Latent Variables in Time-Varying Expected Returns Compensation for Consumption Risk?” Journal of Finance, 45 (05 1990), 397–429.Google Scholar
Ferson, W. E., and Foerster, S. R.. “Finite Sample Properties of the Generalized Method of Moments in Tests of Conditional Asset Pricing Models.” Journal of Financial Economics, 36 (08 1994), 29–56.CrossRefGoogle Scholar
Ferson, W. E., and Harvey, C. R.. “The Variation of Economic Risk Premiums.” Journal of Political Economy, 99 (04 1991), 385–15.CrossRefGoogle Scholar
Ferson, W. E., and Harvey, C. R.. “The Risk and Predictability of International Equity Returns.” Review of Financial Studies, 6 (1993), 527–566.CrossRefGoogle Scholar
Harvey, C. “Predictable Risk and Returns in Emerging Markets.” Review of Financial Studies, 8 (1995), 773–816.CrossRefGoogle Scholar
Jorion, P. “The Exchange Rate Exposure of U.S. Multinationals.” Journal of Business, 63 (07 1990), 331–345.CrossRefGoogle Scholar
Jorion, P. “The Pricing of Exchange Rate Risk in the Stock Market.” Journal of Financial and Quantitative Analysis, 26 (09 1991), 363–376.CrossRefGoogle Scholar
Keim, D., and Stambaugh, R.. “Predicting Returns in the Stock and Bond Markets.” Journal of Financial Economics, 17 (12 1986), 357–390.CrossRefGoogle Scholar
Kim, H. Y., and Mei, J.. “Political Risk and Stock Returns: The Case of Hong Kong.” Working Paper, New York Univ. (12 1994).Google Scholar
Kim, Y. C., and Stulz, R. M.. “The Eurobond Market and Corporate Financial Policy: A Test of the Clientele Hypothesis.” Journal of Financial Economics, 22 (12 1988), 189–206.CrossRefGoogle Scholar
Korajczyk, R. A. “The Pricing of Forward Contracts for Foreign Exchange.” Journal of Political Economy, 93 (04 1985), 346–368.CrossRefGoogle Scholar
Korajczyk, R. A., and Viallet, C. J.. “Equity Risk Premia and the Pricing of Foreign Exchange Risk.” Journal of International Economics, 33 (05 1992), 199–219.CrossRefGoogle Scholar
McCurdy, T. H., and Morgan, I.. “Tests for a Systematic Risk Component in Deviations from Uncovered Interest Rate Parity.” Review of Economic Studies, 58 (05 1991), 587–602.CrossRefGoogle Scholar
McElroy, M., and Burmeister, E.. “Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model.” Journal of Business and Economic Statistics, 6 (01 1988), 29–42.Google Scholar
Murphy, K. M., and Topel, R. H.. “Estimation and Inference in Two-Step Econometric Models.” Journal of Business and Economic Statistics, 3 (10 1985), 370–379.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (05 1987), 703–708.CrossRefGoogle Scholar
Pagan, A. “Econometric Issues in the Analysis of Regressions with Generated Regressors.” International Economic Review, 25 (02 1984), 221–247.CrossRefGoogle Scholar
Shanken, J. “On the Estimation of Beta-Pricing Models.” Review of Financial Studies, 5 (1992), 1–34.CrossRefGoogle Scholar
Smirlock, M., and Kaufold, H.. “Bank Foreign Lending, Mandatory Disclosure Rules, and the Reaction of Bank Stock Prices to the Mexican Debt Crisis.” Journal of Business, 60 (07 1987), 347–364.CrossRefGoogle Scholar
Smith, C. W., and Stulz, R. M.. “The Determinants of Firms' Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (12 1985), 391–406.CrossRefGoogle Scholar
Umlauf, S. R. “An Empirical Study of the Mexican Treasury Bill Auction.” Journal of Financial Economics, 33 (06 1993), 313–340.CrossRefGoogle Scholar