The insignificance of currency risk in emerging markets is particularly puzzling, given a lack of hedging instruments and volatile currency movements in these markets. In this paper, we conjecture that this puzzle may be due to the comovement between exchange rates and the market factor in these markets. Our conjecture is motivated by both theory and empirical evidence. We test our conjecture with the Taiwan market data and find supporting evidence. Our findings have important theoretical as well as practical implications. In terms of theoretical implications, the extant currency risk literature generally models currency risk as a separate risk factor. The results in this paper suggest that researchers instead should focus on the linkage between currency risk and the standard asset pricing factors. In terms of practical implications, our results imply that the standard asset-pricing models without currency risk may be sufficient for practical decision making in emerging markets, since exchange rate changes may not have incremental information relative to the market factor in these markets.
