Assessing the extent of exchange rate risk pricing in equity markets: emerging versus developed economies

Lumengo Bonga-Bonga, Salifya Mpoha
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Abstract

Purpose

This paper contributes to the literature on exchange rate exposure by assessing the extent to which exchange rate risk is priced in both African emerging and developed equity markets. It examines whether this risk leads to a premium or discount in market returns. The study uses the United States and South Africa as representatives for developed and emerging economies, respectively.

Design/methodology/approach

The paper employs two-factor and three-factor conditional CAPM approaches with a two-stage estimation process. In the first stage, time-varying risk exposures are derived using the ICAPM model estimated through rolling regression. In the second stage, the impact of these risk exposures, particularly exchange rate risk exposure, is assessed on stock market returns using Generalized Linear Model (GLM) regression.

Findings

Unlike previous studies that suggest exchange rate risk is not necessarily priced in the equity market due to hedging, this paper finds that exchange rate risk is indeed priced in both African and developed equity markets, albeit to different extents. The African equity market demands a higher premium compared to the developed equity market.

Practical implications

The findings of this paper have significant implications for policymakers, asset managers, and investors. They provide insights for making more informed decisions, implementing effective risk management strategies, and fostering a more stable and appealing investment environment.

Originality/value

To the best of our knowledge, this is the first study to evaluate the degree of exchange rate exposure in environments characterized by high currency volatility versus those with low volatility, all within the context of the conditional ICAPM model.

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评估股票市场汇率风险定价的程度:新兴经济体与发达经济体
目的 本文通过评估汇率风险在非洲新兴和发达股票市场的定价程度,为有关汇率风险的文献做出了贡献。本文探讨了这种风险是否会导致市场回报的溢价或折价。本研究分别以美国和南非作为发达经济体和新兴经济体的代表。 本文采用双因素和三因素条件 CAPM 方法,并进行了两阶段的估算。在第一阶段,使用 ICAPM 模型通过滚动回归估算得出时变风险敞口。研究结果以往的研究表明,由于套期保值的原因,汇率风险不一定会在股票市场上被定价,但本文发现,汇率风险确实在非洲和发达国家的股票市场上被定价,尽管程度不同。与发达股票市场相比,非洲股票市场需要更高的溢价。据我们所知,这是第一项在有条件的 ICAPM 模型中评估高货币波动性环境与低波动性环境下汇率风险程度的研究。
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来源期刊
CiteScore
3.20
自引率
7.70%
发文量
41
期刊介绍: African Journal of Economic and Management Studies (AJEMS) advances both theoretical and empirical research, informs policies and practices, and improves understanding of how economic and business decisions shape the lives of Africans. AJEMS is a multidisciplinary journal and welcomes papers from all the major disciplines in economics, business and management studies.
期刊最新文献
Examining the relationship between inclusive growth and tax revenue mobilization: additional evidence from sub-Saharan African countries Tariff effects on industrial performance: symmetric and asymmetric evidence from Nigeria Capital market development in emerging African countries: the pandemic problem and role of macroeconomic policies Assessing the extent of exchange rate risk pricing in equity markets: emerging versus developed economies Fiscal policy and poverty reduction in sub-Saharan Africa: is the relationship influenced by the business cycle?
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