Abstract:
In this paper, time-varying market and currency risks among a selected
set of developed and emerging economies are compared in terms of
stochastic dominance. For this purpose, time-varying exchange rate
exposure and market betas are obtained through a multivariate model that
explicitly allows for time-varying second moments. Two betas are not
assumed to be orthogonal and we explicitly allow for non-orthogonality.
The cumulative distribution functions of time-varying betas in the sample
indicate that stock returns in emerging economies are more exposed to
currency risk, though their exposure to market risk is moderate. On the
contrary, the stock returns in developed economies are more exposed to
market risk while their exposure to currency risk is remarkably low.
There is also evidence to establish the notion that, during the postcurrency crisis period, currency risk in Korea is fading out over time.
