Risk exposure and financial policy: An empirical analysis of emerging markets

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Risk Exposure in Emerging Markets

background

Many emerging countries have experienced periodic currency crisis had a negative impact on their economies and securities markets. However, there is no comprehensive study that the independent action of the local currency and market risk on equity and its empirical relationship over time analyzed.

The question of whether the exchange rate risk on the exchange rates are discussed in the empirical literature with mixed data and the results are sometimes contradictory. The first theoretical models of international asset pricing (IPM) clearly show that the effect of deviations from purchasing power parity (PPP) should exchange risk cost and expected stock returns for a premium for bearing [close to see the exchange rate risk, for example, Stulz (1981) and Adler and Dumas ( 1983), and the review by Karolyi and Stulz (2002)]. Attempts IAPMs as non-conditional inconclusive.1 prove, however, using a variety of conditions, studies such as Dumas and Solnik (1995) and De Santis and Gerard (1998) strong evidence provide that the currency risk priced industrial action in the markets. 2 However, such evidence is not sufficient to conclude that the exchange rate risk could be relevant stock market prices and factor in different environments, such as Emerging Markets (EM) in other local sources of risk is more important.

It is furthermore vital to understand how the financial liberalization method leverages the constituents of instability because this advances our comprehending of the going by car forces of a promise change in the total volatility. The financial liberalization method can sway methodical and idiosyncratic constituents of instability in distinct modes and through distinct motives, producing in significant significances for investors searching diversification. A nominee interpretation of a likely change in methodical instability due to the method of financial liberalization may be the change in market dynamics that happens when moving from a segmented market to an incorporated market. As the stage of financial liberalization in appearing markets rises and these markets become more incorporated into international capital markets, exposure to localized components declines (Foerster and Karolyi, 1999). Thus, international components can play a more significant function in working out the stock-return volatility. Given the high instability of appearing markets (Harvey, 1995) and the more steady environment of the international market, in the transition from a segmented market to an incorporated market a decline in localized instability and an boost in international instability are likely.

To our knowledge, only two empirical studies have specifically looked at the role of exchange rate risk from local bilateral exchange rates ...