Uncovered Equity 'Disparity' in Emerging Markets

55 Pages Posted: 22 Jul 2018

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

Durham University - Department of Economics and Finance

Date Written: March 11, 2017

Abstract

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

Fuertes, Ana-Maria and Phylaktis, Kate and Yan, Cheng, Uncovered Equity 'Disparity' in Emerging Markets (March 11, 2017). 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)

Durham University - Department of Economics and Finance ( email )

Durham, DH1 3HY
United Kingdom

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