Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Dynamic Asymmetric Effect of Currency Risk Pricing of Exchange Rate on Equity Markets: A Regime-Switching based C-Vine Copulas Method

Version 1 : Received: 8 August 2022 / Approved: 10 August 2022 / Online: 10 August 2022 (09:32:45 CEST)

How to cite: Muteba Mwamba, J.W.; Mudiangombe Mudiangombe, B. Dynamic Asymmetric Effect of Currency Risk Pricing of Exchange Rate on Equity Markets: A Regime-Switching based C-Vine Copulas Method. Preprints 2022, 2022080196 (doi: 10.20944/preprints202208.0196.v1). Muteba Mwamba, J.W.; Mudiangombe Mudiangombe, B. Dynamic Asymmetric Effect of Currency Risk Pricing of Exchange Rate on Equity Markets: A Regime-Switching based C-Vine Copulas Method. Preprints 2022, 2022080196 (doi: 10.20944/preprints202208.0196.v1).

Abstract

This paper investigates whether currency risk is priced differently in the different sectors (industrial, financial, and basic materials) of equity markets in a sample of developed United States of America (USA) and developing economies (Brazil, India, Poland, and South Africa). The paper makes use of the following techniques: (i) Univariate Autoregressive Fractionally Integrated Moving Average and Exponential General Autoregressive Conditional Heteroskedastic (ARFIMA-EGARCH), (ii) the Markov-Switching method (MS), and (iii) the Canonical Vine Copulas (C-Vine) techniques. Using a sample of daily data made of the foreign exchange rate against the domestic currency and equity market sectors; our findings show that there is an asymmetry effect between equities markets and the foreign exchange rate: there is a heterogeneous, strong, and positive dependence between the two. Higher equities prices are associated with depreciation of local currencies, according to US dollar (USD) exchange rates. In addition, we find that the selected emerging economies are pricing a positive and considerable currency risk. The pricing of currency risk has a varied effect in both regimes representing the states of the economy. In fact, when currency risk pricing has a beneficial impact on certain sectors of the economy, investors predict better returns.

Keywords

Pricing currency risk; regime-switching; sectors equity markets; state of economy; C-Vine copulas; developed; emerging

Subject

SOCIAL SCIENCES, Finance

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