City Research Online

Uncovered Equity “Disparity” in Emerging Markets

Fuertes, A-M. ORCID: 0000-0001-6468-9845, Phylaktis, K. ORCID: 0000-0001-9392-1682 and Yan, C. (2019). Uncovered Equity “Disparity” in Emerging Markets. Journal of International Money and Finance, doi: 10.1016/j.jimonfin.2019.102066

Abstract

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.

Publication Type: Article
Additional Information: © Elsevier 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Uncovered Equity Parity, Equity flows, Equity returns, Foreign exchange rates, Return-chasing, Asian markets
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/22585
[img] Text - Accepted Version
This document is not freely accessible until 25 January 2020 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

To request a copy, please use the button below.

Request a copy

Export

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login