Does Emerging Market Exchange Risk Affect Global Equity Prices?
45 Pages Posted: 13 Dec 2004
Date Written: May 2004
We provide new evidence on the pricing of exchange risk in the global stock markets. We conduct empirical tests in a conditional setting for ten developed markets and twelve emerging markets to determine whether emerging market currency risk affects emerging market equities and if it spills over into developed markets. In addition to using real exchange rates for the risk related to PPP deviations, our empirical model allows currency risk to compete with broader economic and political risks. Our main results support the hypothesis of significant exchange risk premia for both developed and emerging market assets. There is also evidence that emerging market currency risk is priced separately from other emerging market specific risks. Finally, we find that the spillover impact is heightened during crisis episodes and such information in particular affects world and major currency risks.
Keywords: Currency risk, currency crisis, emerging markets, spillover, international markets
JEL Classification: G12, G15, F3, F31
Suggested Citation: Suggested Citation