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Decomposition of the uncovered equity parity correlation

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  • Kunkler, Michael
  • MacDonald, Ronald

Abstract

Central to the uncovered equity parity (UEP) condition are the sign and magnitude of the observed UEP correlation. In this paper, we decompose the UEP correlation at two different levels of granularity: a macro (bilateral) level and a micro (multilateral) level. We achieve the decomposition of the UEP correlation by first decomposing the local price of each local equity market into two global (multilateral) prices: the global price of the local equity market; and the global price of the local currency. We find that the heterogeneity of the local currencies provides a number of explanations for the empirical inconsistency of both the sign and the magnitude of the observed UEP correlations.

Suggested Citation

  • Kunkler, Michael & MacDonald, Ronald, 2018. "Decomposition of the uncovered equity parity correlation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 44-58.
    • Handle: RePEc:eee:intfin:v:57:y:2018:i:c:p:44-58
    DOI: 10.1016/j.intfin.2018.04.006
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    Cited by:

    1. Kunkler, Michael, 2021. "Currency hedging for single-currency equity portfolios: Does cross-asset risk matter?," Global Finance Journal, Elsevier, vol. 49(C).
    2. Stoupos, Nikolaos & Nikas, Christos & Kiohos, Apostolos, 2023. "Turkey: From a thriving economic past towards a rugged future? - An empirical analysis on the Turkish financial markets," Emerging Markets Review, Elsevier, vol. 54(C).
    3. Lucjan Orlowski & Carolyne Soper & Monika Sywak, 2023. "Uncovered equity returns parity in non‐euro Central European EU member countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 307-315, January.

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    More about this item

    Keywords

    Uncovered equity parity condition; Exchange rates; Stock market differentials;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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