Currency risk and market integration

Abstract

Market integration and currency risk are two main factors that distinguish international investment and financing decisions. Hence, we investigate the impact of currency factor on the dynamics of market integration. We compare integration indices estimated from conditional international asset pricing models with and without real exchange risk. We also examine the sensitivity of the multifactor asset pricing model to omitted currency factors. In general, although the currency risk is significantly priced, it does not affect the level and the dynamics of the integration measure except under crises conditions.

Keywords: Real exchange rate risk premium, market integration, international asset pricing, emerging markets.

JEL Classification: G15, F30, G30