Abstract
This study is dedicated to estimating the impact of currency risk on the cost of equity in Brazil, Russia, India and South Africa. Our contribution to the literature is that we obtain further evidence on pricing of exchange rate risk in developing countries which for now is quite scarce. These motivates our research which is dedicated to BRICS capital markets with Chinese stock market excluded since it is heavily regulated. The aim of the research is to determine whether in emerging countries stock markets currency risk is a significant factor that influence cost of equity capital of a company.
 Changes in the value of exchange rate can impact cash flows of a firm and their riskiness, hence, the value of the company. In our research we will discuss the influence of exchange rate movements on the value of the firm through their impact on the cost of equity. Specifically, we investigate whether companies that report substantial currency gains or losses have to pay a higher required return on equity. Furthermore, in this study we take an attempt to estimate currency risk premia for exposure to appreciation and depreciation of currency separately and identify possible differences.
 For each country three models that extend Fama-French Three Factor Model by incorporating currency risk are estimated. We used equal-weighted portfolio approach to construction currency risk factors. They are estimated using information about the ratio of currency gains to sales or the magnitude of covariation between equity returns and exchange rate changes. In the second case appreciation and depreciation of domestic currency against US dollar is considered separately.
 Results indicate that in Russia firms which report substantial currency losses pay a positive risk premium, while in Brazil, India and South Africa companies with significantly positive or negative currency gains pay a lower required return on equity than firms with almost zero currency gains. Finally, we are trying to explain estimation results using sectoral breakdown of product exports in each country of data sample.
Highlights
The impact of upward or downward exchange rate movements on stock market performance has important implications in terms of risk management, trading and hedging strategies for international portfolios
In the first section we review empirical studies which are dedicated to exchange rate exposure and pricing of currency risk, and which give a summary of the approaches, methods, and results of studies of interest
The results of the estimation for Russia, Brazil, India and South Africa are presented in Tables 3, 4, 5 and 6, respectively
Summary
The impact of upward or downward exchange rate movements on stock market performance (and vice versa) has important implications in terms of risk management, trading and hedging strategies for international portfolios. The stock market impacts the exchange rate market due to the fact that changes in stock prices alter the attractiveness of domestic assets and leads to inflows or outflows of capital. For this reason, it is extremely important for international investors, top management of companies, and policy makers to understand the relationship between stock prices and exchange rates. Two years later the list was extended: the Brazilian Real, Colombian Peso, Chilean Peso, South African Rand, Peruvian Sol, South Korean Won, Thai Baht, Russian Ruble, Singapore Dollar, and Taiwan Dollar were named the “fragile ten” [2] Still, it is not obvious in which cases this depreciation represented a significant currency risk. Morgan Stanley analysts believe that securities in South Africa and India were not substantially harmed by currency depreciation as of December of 2013 [3]
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
