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Uncovered equity “disparity” in emerging markets

Ana-Maria Fuertes (), Kate Phylaktis () and Cheng Yan

Journal of International Money and Finance, 2019, vol. 98, issue C, -

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.

Keywords: Uncovered equity parity; Equity flows; Equity returns; Foreign exchange rates; Return-chasing; Asian markets (search for similar items in EconPapers)
JEL-codes: F31 G10 G11 G15 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:98:y:2019:i:c:5

DOI: 10.1016/j.jimonfin.2019.102066

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