Uncovered Equity 'Disparity' in Emerging Markets
55 Pages Posted: 22 Jul 2018
Date Written: March 11, 2017
The portfolio-rebalancing theory of Hau and Rey (2006) yields uncovered equity parity (UEP) as a prediction that local-currency equity return appreciation is offset by currency depreciation. Contrary to UEP, estimations of vector autoregressive models for eight Asian emerging markets using daily data reveals a positive nexus between equity returns and currency returns. The extent of the uncovered equity “disparity” is time-varying and asymmetric as it exacerbates in crisis. We find evidence that the UEP failure is due to investors’ return chasing. Robustness checks suggest that this explanation is not an artifact of changing global volatility conditions or a flight-to-quality phenomenon.
Keywords: Uncovered Equity Parity, Equity Flows, Equity Returns, Foreign Exchange Rates, Return-Chasing
JEL Classification: F31, G10, G11, G15
Suggested Citation: Suggested Citation