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Uncovered Equity “Disparity” in Emerging Markets

Fuertes, A-M. ORCID: 0000-0001-6468-9845, Phylaktis, K. ORCID: 0000-0001-9392-1682 & Yan, C. (2019). Uncovered Equity “Disparity” in Emerging Markets. Journal of International Money and Finance, 98, article number 102066. doi: 10.1016/j.jimonfin.2019.102066


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
Publisher Keywords: Uncovered Equity Parity, Equity flows, Equity returns, Foreign exchange rates, Return-chasing, Asian markets
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
SWORD Depositor:
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