Title: Do emerging markets provide currency diversification benefits?

Authors: Ines Chaieb; Vihang Errunza; Basma Majerbi

Addresses: University of Geneva and Swiss Finance Institute, UniMail, Bd du Pont d'Arve 40, CH-1211 Geneva 4, Switzerland ' McGill University, Faculty of Management, 1001 Sherbrooke St. West, Montreal, Qc, H3A 1G5, Canada ' Faculty of Business, University of Victoria, P.O. Box 1700, STN CSC, Victoria, BC, V8W 2Y2, Canada

Abstract: We examine the role of emerging markets in providing currency diversification benefits. We use global sectoral portfolios for developed and emerging markets. Our empirical tests based on a conditional international asset pricing model show that on average the prices of currency risks are very close to zero but they increase significantly during crisis periods. We find that the currency exposures and risk premia are lowest for the G7 portfolios augmented with a small set of eight emerging markets over most of the time period for almost all sectors. Finally, holding a most diversified portfolio of developed and emerging markets may not provide additional benefits.

Keywords: international asset pricing; currency risk; emerging markets; international diversification; global sector investment; currency diversification.

DOI: 10.1504/IJBAAF.2013.058087

International Journal of Banking, Accounting and Finance, 2013 Vol.5 No.1/2, pp.102 - 120

Published online: 18 Jul 2014 *

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