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A market-based measure for currency risk in managed exchange rate regimes

Stefan Eichler and Ingmar Roevekamp

Journal of International Financial Markets, Institutions and Money, 2018, vol. 57, issue C, 141-159

Abstract: We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994–2014 period, we find that a deterioration in the fiscal balance and higher inflation increase currency risk. Interaction models reveal that the fiscal balance and inflation drive the determination of currency risk for countries with poor sovereign rating, low foreign reserves, low capital account openness and managed float regimes.

Keywords: Currency risk; Currency crises; American Depositary Receipts; Emerging markets (search for similar items in EconPapers)
JEL-codes: F31 F32 G01 G15 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:intfin:v:57:y:2018:i:c:p:141-159