Dynamic Asymmetric Effect of Currency Risk Pricing of Exchange Rate on Equity Markets: A Regime-Switching Based C-Vine Copulas Method

Benjamin Mudiangombe Mudiangombe and John Weirstrass Muteba Mwamba
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Benjamin Mudiangombe Mudiangombe: School of Economics, University of Johannesburg, P.O. Box 524, Auckland Park, Johannesburg 2006, South Africa

IJFS, 2022, vol. 10, issue 3, 1-30

Abstract: This paper investigates whether currency risk is priced differently in the different sectors (industrial, financial, and basic materials) of equity markets in a sample of developed United States of America (USA) and developing economies (Brazil, India, Poland, and South Africa). The paper makes use of the following techniques: (i) Univariate Autoregressive Fractionally Integrated Moving Average and Exponential General Autoregressive Conditional Heteroskedastic (ARFIMA-EGARCH), (ii) the Markov Switching method (MS), and (iii) the Canonical Vine Copulas (C-Vine) techniques. Using a sample of daily data made of the foreign exchange rate against the domestic currency and equity market sectors; our findings show that there is an asymmetry effect between equity markets and the foreign exchange rate: there is a heterogeneous, strong, and positive dependence between the two. Higher equity prices are associated with depreciation of local currencies, according to US dollar (USD) exchange rates. In addition, we find that the selected emerging economies are pricing a positive and considerable currency risk. The pricing of currency risk has a varied effect in both regimes representing the states of the economy. In fact, when currency risk pricing has a beneficial impact on certain sectors of the economy, investors predict better returns.

Keywords: pricing currency risk; regime-switching; sectors equity markets; state of economy; C-Vine copulas; developed; emerging (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
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