Uncovered return parity: Equity returns and currency returns

Djeutem, Edouard; Dunbar, Geoffrey R.

doi:10.1016/j.jimonfin.2022.102706

Cited by 6 publications

(1 citation statement)

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“…Most of the literature investigating the relationship between equity market returns and exchange rates focuses on a causal impact of changes in equity returns on the exchange rates. However, a prevalent outcome of the empirical research on UERP is that such balancing condition does not always hold (Capiello & De Santis, 2005;Cenedese, Payne, Sarno, & Valente, 2015;Djeutem & Dunbar, 2018;Katechos, 2011). Counterfactual evidence has been also provided in the literature.…”

Section: Survey Of Pertinent Literaturementioning

confidence: 99%

Uncovered equity returns parity in non‐euro Central European EU member countries

2021

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This paper examines a nexus between euro values of local currencies and returns to equities in non-euro Central European countries (CECs) relative to returns in a global equity market. In essence, it analyses whether the uncovered equity returns parity (UERP) condition holds in these countries. In theory, the UERP condition holds if higher returns in a local equity market relative to the global market returns are offset by the local currency depreciation. The underlying UERP model examines the relationship between local currencies in euro and CEC equity returns relative to a global market index proxied by Wilshire5000 index. We assume that the UERP relationship is country-sensitive, time-dependent and state-dependent, that is, it varies among countries and depends on economic and financial market conditions. The model is tested with the Bai-Perron multiple breakpoint regressions for structural breaks, as well as the two-state Markov switching test for state dependence, during the January 4, 1999-February 25, 2020 sample period. We find that UERP condition holds in CECs mainly at times of financial distress, including the peak and the aftermath of the 2008-2010 global financial crisis.

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Section: Survey Of Pertinent Literaturementioning

confidence: 99%