Uncovered Equity 'Disparity' in Emerging Markets

49 Pages Posted: 22 Jul 2018 Last revised: 11 Sep 2019

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Kate Phylaktis

City University London - Sir John Cass Business School

Cheng Yan

Essex Business School

Date Written: July 11, 2019

Abstract

The portfolio-rebalancing theory of Hau and Rey (2006) yields the uncovered equity parity (UEP) prediction that local-currency equity return appreciation is offset by currency depreciation. Vector autoregressive model estimation and tests for eight Asian emerging markets using daily data reveal instead a positive nexus between equity returns and currency returns. The extent of the uncovered equity “disparity” is time-varying and asymmetric since it exacerbates in crises. Our analysis suggests that the UEP failure is primarily due to investors’ return-chasing behavior. Robustness checks confirm that this explanation of the uncovered equity “disparity” is more appropriate than existing flight-to-safety or market risk conjectures.

Keywords: Uncovered Equity Parity; Equity flows; Equity returns; Foreign exchange rates; Return-chasing; Asian markets

JEL Classification: F31, G10, G11, G15

Suggested Citation

Fuertes, Ana-Maria and Phylaktis, Kate and Yan, Cheng, Uncovered Equity 'Disparity' in Emerging Markets (July 11, 2019). Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3205055 or http://dx.doi.org/10.2139/ssrn.3205055

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Kate Phylaktis

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/

Cheng Yan (Contact Author)

Essex Business School ( email )

University of Essex
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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