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Uncovered Equity “Disparity” in Emerging Markets

Fuertes, Ana-Maria and Phylaktis, Kate and Yan, Cheng (2019) 'Uncovered Equity “Disparity” in Emerging Markets.' Journal of International Money and Finance. ISSN 0261-5606

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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.

Item Type: Article
Uncontrolled Keywords: Uncovered Equity Parity, Equity flows, Equity returns, Foreign exchange rates, Return-chasing, Asian markets
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 26 Jul 2019 09:08
Last Modified: 26 Jul 2019 09:08

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