Decomposition of the uncovered equity parity correlation

Kunkler, M. and MacDonald, R. (2018) Decomposition of the uncovered equity parity correlation. Journal of International Financial Markets, Institutions and Money, 57, pp. 44-58. (doi: 10.1016/j.intfin.2018.04.006)

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Abstract

Central to the uncovered equity parity (UEP) condition are the sign and magnitude of the observed UEP correlation. In this paper, we decompose the UEP correlation at two different levels of granularity: a macro (bilateral) level and a micro (multilateral) level. We achieve the decomposition of the UEP correlation by first decomposing the local price of each local equity market into two global (multilateral) prices: the global price of the local equity market; and the global price of the local currency. We find that the heterogeneity of the local currencies provides a number of explanations for the empirical inconsistency of both the sign and the magnitude of the observed UEP correlations.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:MacDonald, Professor Ronald
Authors: Kunkler, M., and MacDonald, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of International Financial Markets, Institutions and Money
Publisher:Elsevier
ISSN:1042-4431
ISSN (Online):1873-0612
Published Online:19 May 2018

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