A Market-based Measure for Currency Risk in Managed Exchange Rate Regimes

43 Pages Posted: 27 Feb 2016 Last revised: 20 Feb 2018

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universität Hannover; Halle Institute for Economic Research

Ingmar Roevekamp

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: February 20, 2018

Abstract

We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that the effects of these macroeconomic fundamentals on currency risk depend on the country’s sovereign rating, the level of foreign reserves, capital openness and the exchange rate regime.

Keywords: Currency risk, Currency crises, American Depositary Receipts, Emerging markets

JEL Classification: F31, F32, G01, G15

Suggested Citation

Eichler, Stefan and Roevekamp, Ingmar, A Market-based Measure for Currency Risk in Managed Exchange Rate Regimes (February 20, 2018). Available at SSRN: https://ssrn.com/abstract=2738025 or http://dx.doi.org/10.2139/ssrn.2738025

Stefan Eichler

Leibniz Universität Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Ingmar Roevekamp (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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