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Decomposition of the uncovered equity parity correlation

Michael Kunkler and Ronald MacDonald ()

Journal of International Financial Markets, Institutions and Money, 2018, vol. 57, issue C, 44-58

Abstract: Central to the uncovered equity parity (UEP) condition are the sign and magnitude of the observed UEP correlation. In this paper, we decompose the UEP correlation at two different levels of granularity: a macro (bilateral) level and a micro (multilateral) level. We achieve the decomposition of the UEP correlation by first decomposing the local price of each local equity market into two global (multilateral) prices: the global price of the local equity market; and the global price of the local currency. We find that the heterogeneity of the local currencies provides a number of explanations for the empirical inconsistency of both the sign and the magnitude of the observed UEP correlations.

Keywords: Uncovered equity parity condition; Exchange rates; Stock market differentials (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:57:y:2018:i:c:p:44-58

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