HOW DOES CURRENCY RISK FROM THE EMERGING MARKETS AFFECT RETURNS OF THE U.S. INVESTORS?

This paper demonstrates how U.S. stock returns correlate with emerging market stock returns in Brazil, China, Mexico, India and Turkey, and the correlation among these emerging market returns. The emerging market returns have two components: local currency stock market return and exchange rate return. The currency risk is driven by standard deviation and correlation. By breaking down the correlation and standard deviation into foreign exchange rate return and local stock return components, we conclude that emerging markets have diversification benefits.