Do Emerging Markets Provide Currency Diversification Benefits?

Int. J. Banking, Accounting and Finance (Forthcoming)

25 Pages Posted: 12 Nov 2013  

Ines Chaieb

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Basma Majerbi

Gustavson School of Business, University of Victoria

Date Written: July 11, 2013

Abstract

We examine the role of emerging markets in providing currency diversification benefits. We use global sectoral portfolios for developed and emerging markets. Our empirical tests based on a conditional international asset pricing model show that on average the prices of currency risks are very close to zero but they increase significantly during crisis periods. We find that the currency exposures and risk premia are lowest for the G7 portfolios augmented with a small set of eight emerging markets over most of the time period for almost all sectors. Finally, holding a most diversified portfolio of developed and emerging markets may not provide additional benefits.

Keywords: international asset pricing; currency risk; emerging markets; international diversification; global sector investing.

JEL Classification: F21, F31, G12, G15

Suggested Citation

Chaieb, Ines and Errunza, Vihang R. and Majerbi, Basma, Do Emerging Markets Provide Currency Diversification Benefits? (July 11, 2013). Int. J. Banking, Accounting and Finance (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2352802

Ines Chaieb (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41223798568 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Vihang R. Errunza

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)

Basma Majerbi

Gustavson School of Business, University of Victoria ( email )

Victoria, British Columbia
Canada
250-472-4281 (Phone)

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