Does Emerging Market Exchange Risk Affect Global Equity Prices?

45 Pages Posted: 13 Dec 2004

See all articles by Francesca Carrieri

Francesca Carrieri

McGill University - Desautels Faculty of Management

Vihang R. Errunza

McGill University - Desautels Faculty of Management

Basma Majerbi

Gustavson School of Business, University of Victoria

Date Written: May 2004

Abstract

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

Carrieri, Francesca and Errunza, Vihang R. and Majerbi, Basma, Does Emerging Market Exchange Risk Affect Global Equity Prices? (May 2004). Available at SSRN: https://ssrn.com/abstract=631202 or http://dx.doi.org/10.2139/ssrn.631202

Francesca Carrieri (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-1582 (Phone)
514-398-3876 (Fax)

Vihang R. Errunza

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
514-398-4056 (Phone)
514-398-3876 (Fax)

Basma Majerbi

Gustavson School of Business, University of Victoria ( email )

Victoria, British Columbia
Canada
250-472-4281 (Phone)

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