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Exchange rate regimes, globalisation, and the cost of capital in emerging markets

  • de los Rios, Antonio Diez

This paper presents a multifactor asset pricing model for currency, bond, and stock returns for ten emerging markets to investigate the effect of the exchange rate regime on the cost of capital and the integration of emerging financial markets. Our results suggest that a fixed exchange rate regime system can help reduce the cost of capital in emerging markets by reducing the currency risk premia demanded by foreign investors.

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Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 10 (2009)
Issue (Month): 4 (December)
Pages: 311-330

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Handle: RePEc:eee:ememar:v:10:y:2009:i:4:p:311-330
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  1. Jacobsen, Brian J. & Liu, Xiaochun, 2008. "China's segmented stock market: An application of the conditional international capital asset pricing model," Emerging Markets Review, Elsevier, vol. 9(3), pages 153-173, September.
  2. Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
  3. Philippe Jorion, 1988. "On Jump Processes in the Foreign Exchange and Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 427-445.
  4. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  5. Gary Chamberlain & Michael Rothschild, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," NBER Working Papers 0996, National Bureau of Economic Research, Inc.
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  7. Pavlova, Anna & Rigobon, Roberto, 2003. "Asset Prices and Exchange Rates," Working papers 4322-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Vlaar, Peter J G & Palm, Franz C, 1993. "The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 351-60, July.
  9. Sentana, Enrique, 2000. "Did the EMS Reduce the Cost of Capital?," CEPR Discussion Papers 2640, C.E.P.R. Discussion Papers.
  10. Sentana, E. & Fiorentini, G., 1997. "Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Model," Papers 9709, Centro de Estudios Monetarios Y Financieros-.
  11. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  12. Ball, Clifford A. & Torous, Walter N., 1983. "A Simplified Jump Process for Common Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(01), pages 53-65, March.
  13. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  14. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
  15. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  17. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
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  20. Das, Sanjiv R., 2002. "The surprise element: jumps in interest rates," Journal of Econometrics, Elsevier, vol. 106(1), pages 27-65, January.
  21. Markus Haas, 2004. "Mixed Normal Conditional Heteroskedasticity," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(2), pages 211-250.
  22. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  23. Geert Bekaert & Campbell R. Harvey, 2003. "Market Integration and Contagion," NBER Working Papers 9510, National Bureau of Economic Research, Inc.
  24. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc.
  25. Bruner, Robert F. & Li, Wei & Kritzman, Mark & Myrgren, Simon & Page, Sébastien, 2008. "Market integration in developed and emerging markets: Evidence from the CAPM," Emerging Markets Review, Elsevier, vol. 9(2), pages 89-103, June.
  26. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, 04.
  27. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
  28. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  29. Solnik, Bruno, 1983. " International Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 38(2), pages 449-57, May.
  30. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  31. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
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