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| We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using a multifactor pricing model we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period we find that a deterioration in the fiscal and current account balance as well as higher inflation increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk particularly in countries with managed exchange rates low levels of foreign exchange reserves and a poor sovereign credit rating. |
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