Currency Risk in Emerging Equity Markets

City University Business School, Finance Working Paper

51 Pages Posted: 6 Mar 2002

See all articles by Fabiola Ravazzolo

Fabiola Ravazzolo

City University London

Kate Phylaktis

City University London - Sir John Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

The paper develops an international capital asset pricing model, which includes foreign currency risk, and examines the impact of capital market liberalisation on the pricing of risks. It applies the model to data from Pacific Basin financial markets and finds substantial evidence that not only currency risk is priced in both pre and post liberalisation periods, but the model is superior to one which does not include currency risk. This evidence suggests that an international capital asset pricing model which omits currency risk will be misspecified. Furthermore, the results imply that since currency risk is priced and investors are compensated for bearing such risk they should not be discouraged by more flexible exchange rates from investing in emerging markets.

Keywords: International capital asset pricing models (ICAPM), currency risk, capital market integration, emerging markets, and Pacific-Basin capital markets

JEL Classification: F31, G12

Suggested Citation

Ravazzolo, Fabiola and Phylaktis, Kate, Currency Risk in Emerging Equity Markets (February 2002). City University Business School, Finance Working Paper. Available at SSRN: https://ssrn.com/abstract=302440 or http://dx.doi.org/10.2139/ssrn.302440

Fabiola Ravazzolo

City University London ( email )

Frobisher Crescent
Barbican Centre
London, EC1V OHB
United Kingdom
(44) 171 477 8881 (Fax)

Kate Phylaktis (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

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