On May 12, Dr. Yan Cheng from Durham University visited School of Economics and Commerce, giving an academic lecture entitled as Uncovered Equity “Disparity” in Emerging Markets in B10 building, university town campus. Professor Tian Qiusheng, associated dean of SEC, hosted the lecture. Faculty and students actively took part in the lecture.
On the basis of China’s international financial environment, Dr. Yan made conclusions on the current academic research development in the field of uncovered equity disparity by digging out and analyzing eight countries’ stock data to explain why the equity returns and foreign currency returns had positive relations in emerging markets.
He found that the portfolio-rebalancing theory of Hau and Rey (2006) yields uncovered equity parity (UEP) as a prediction that local-currency equity return appreciation was offset by currency depreciation. Contrary to UEP, estimations of vector autoregressive models for eight Asian emerging markets using daily data revealed a positive nexus between equity returns and currency returns. He showed that the extent of the uncovered equity “disparity” was time-varying and asymmetric as it exacerbates in crisis. He provided evidence that the UEP failure was due to investors’ return chasing. Robustness checks suggested that this explanation was not an artifact of changing global volatility conditions or a flight-to-quality phenomenon.
In the Q&A section, Dr. Yan answered participants’ academic questions patiently. (Translated by HUANG Xiaoting, Edited by XU Ruihong)
