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Emerging markets and portfolio foreign exchange risk: An empirical investigation using a value-at-risk decomposition technique

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  • Sirr, Gordon
  • Garvey, John
  • Gallagher, Liam

Abstract

The correlation between a portfolio's equity and foreign exchange components plays a role in reducing foreign exchange exposure. Investors must account for this correlation when determining the extent of foreign exchange risk in emerging market equity portfolio investments. This study employs a VaR risk factor mapping technique, under the variance–covariance VaR approach, to decompose portfolio risk in Argentina, Brazil, China, India, Mexico and Russia. For comparison purposes, the same technique is used to decompose portfolio risk in the US. The study is conducted from the perspective of a European equity investor with a portfolio of equities in each country. By employing the VaR decomposition technique, the correlation between a portfolio's equity and foreign exchange components is taken into account and portfolio foreign exchange risk is extracted from portfolio systematic risk. Our results uniquely demonstrate significant variation in foreign exchange risk in emerging markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 8 ()
Pages: 1749-1772

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:8:p:1749-1772

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Emerging markets; Foreign exchange risk; Risk factor mapping; Value-at-risk; Variance-covariance approach;

References

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Cited by:
  1. Kodongo, Odongo & Ojah, Kalu, 2014. "The conditional pricing of currency and inflation risks in Africa's equity markets," MPRA Paper 56100, University Library of Munich, Germany.

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