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Pricing of foreign exchange risk and market segmentation: Evidence from Pakistan's equity market

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  • Azher, Sara
  • Iqbal, Javed

Abstract

This paper undertakes empirical analysis to investigate whether foreign exchange rate risk is priced, and the extent to which the Pakistani equity market is integrated into world equity markets. For the period January 1993–January 2013, we investigate unconditional pricing using the iterated generalized method of moments, employing industry and size portfolios formed from 180 firms traded on the Karachi Stock Exchange. Using the multi beta asset pricing model, we find that exchange risk is priced into the Pakistani equity market over the full sample period. Moreover, we find strong evidence that the Pakistani equity market is segmented from world markets, especially in the post 9/11 period.

Suggested Citation

  • Azher, Sara & Iqbal, Javed, 2016. "Pricing of foreign exchange risk and market segmentation: Evidence from Pakistan's equity market," Journal of Asian Economics, Elsevier, vol. 43(C), pages 37-48.
    • Handle: RePEc:eee:asieco:v:43:y:2016:i:c:p:37-48
    DOI: 10.1016/j.asieco.2016.03.001
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    More about this item

    Keywords

    Foreign exchange risk; Emerging markets; Multi beta asset pricing models; Market segmentation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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