TY - JOUR
T1 - Emerging markets and portfolio foreign exchange risk
T2 - An empirical investigation using a value-at-risk decomposition technique
AU - Sirr, Gordon
AU - Garvey, John
AU - Gallagher, Liam
PY - 2011/12
Y1 - 2011/12
N2 - 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.
AB - 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.
KW - Emerging markets
KW - Foreign exchange risk
KW - Risk factor mapping
KW - Value-at-risk
KW - Variance-covariance approach
UR - http://www.scopus.com/inward/record.url?scp=80054849876&partnerID=8YFLogxK
U2 - 10.1016/j.jimonfin.2011.08.002
DO - 10.1016/j.jimonfin.2011.08.002
M3 - Article
AN - SCOPUS:80054849876
SN - 0261-5606
VL - 30
SP - 1749
EP - 1772
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
IS - 8
ER -