Currency risk in emerging equity markets |
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| Affiliation: | 1. DePaul University, 1 East Jackson Boulevard, Chicago, IL 606064, USA;2. Indian Institute of Management, Kozhikode, Kerala 673 570, India;1. University of Alaska Fairbanks, 303 Tanana Loop, St. 201, Fairbanks, AK 99775, USA;2. East Carolina University, Department of Finance, 3127 Bate Building, Greenville, NC 27858-4353, USA;1. Cheung Kong Graduate School of Business, 3/F, Tower 3E, Oriental Plaza, 1 East Chang An Avenue, Beijing, 100738, PR China;2. Dalhousie University, Rowe School of Business, Room 4090, 6100 University Avenue, Halifax, Nova Scotia, B3H 4R2, Canada;3. Shanghai, PR China;1. University of Glasgow, Adam Smith Business School (Economics), Glasgow, G12 8QQ, Scotland, United Kingdom;2. Athens University of Economics and Business, Department of Business Administration, 76 Patision Str., GR104 34, Athens, Greece |
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| Abstract: | The paper develops an international capital asset-pricing model (ICAPM), which includes foreign currency risk, and examines the impact of capital market liberalisation on the pricing of risks. It applies the model to data from Pacific Basin financial markets and finds substantial evidence that not only currency risk is priced in both pre- and post-liberalisation periods, but the model is superior to one which does not include currency risk. This evidence suggests that an international capital asset-pricing model, which omits currency risk, will be misspecified. Furthermore, the results imply that since currency risk is priced and investors are compensated for bearing such risk they should not be discouraged by more flexible exchange rate regimes from investing in emerging markets. |
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