The Pricing of Exchange Risk in Emerging Stock Markets

Journal of International Business Studies, Forthcoming

37 Pages Posted: 28 Sep 2005

See all articles by Francesca Carrieri

Francesca Carrieri

McGill University - Desautels Faculty of Management

Basma Majerbi

Gustavson School of Business, University of Victoria

Abstract

In this paper we provide new evidence about the unconditional pricing of exchange risk in the stock market based on emerging market data. We conduct empirical tests using cross-sectional data at the market, portfolio and firm level from nine emerging markets to determine whether exchange risk is priced under alternative model specifications and exchange rate measures. Our results support the hypothesis of a significant unconditional exchange risk premium in emerging stock markets differently from most unconditional tests for major developed markets. However, there is indication that at the aggregate market level the significance of the exchange risk factor is subsumed by local market risk. With firm level data, although the importance of local market is confirmed for most countries, some measure of exchange rate risk remains significant for most countries. This suggests that a careful model specification is necessary for emerging markets when testing for the pricing of exchange risk in order to avoid a potential spurious significance of such factor because of a missing local risk or vice-versa.

Keywords: Exchange risk pricing, Unconditional asset pricing, Emerging markets

JEL Classification: G12, G15

Suggested Citation

Carrieri, Francesca and Majerbi, Basma, The Pricing of Exchange Risk in Emerging Stock Markets. Journal of International Business Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=806364

Francesca Carrieri

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)

Basma Majerbi (Contact Author)

Gustavson School of Business, University of Victoria ( email )

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

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