Uncovered Equity 'Disparity' in Emerging Markets
49 Pages Posted: 22 Jul 2018 Last revised: 20 Feb 2020
Date Written: July 11, 2019
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: Suggested Citation