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Factor reversal in the euro zone stock returns: Evidence from the crisis period

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  • Chou, Hsin-I
  • Zhao, Jing
  • Suardi, Sandy

Abstract

The adoption of the euro led to a shift in importance from country to industry effects in euro zone stock returns. For the first time, this paper shows that country effects have regained importance in the recent spate of crises. This euro-wide factor reversal is driven by countries with poor economic fundamentals, comprising Portugal, Italy, Ireland, Greece, and Spain (PIIGS). The results imply that a more traditional country portfolio approach provides greater diversification benefits during crisis periods and the minimum-variance frontier of industry portfolios in PIIGS countries can be improved by adjusting country weights.

Suggested Citation

  • Chou, Hsin-I & Zhao, Jing & Suardi, Sandy, 2014. "Factor reversal in the euro zone stock returns: Evidence from the crisis period," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 28-55.
    • Handle: RePEc:eee:intfin:v:33:y:2014:i:c:p:28-55
    DOI: 10.1016/j.intfin.2014.07.007
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    Cited by:

    1. Pieterse-Bloem, Mary & Qian, Zhaowen & Verschoor, Willem & Zwinkels, Remco, 2016. "Time-varying importance of country and industry factors in European corporate bonds," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 429-448.
    2. Chiang, Shu-hen & Liu, Wen-Chien & Suardi, Sandy & Zhao, Jing, 2021. "United we stand divided we fall: The time-varying factors driving European Union stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    3. Kräussl, Roman & Lehnert, Thorsten & Stefanova, Denitsa, 2016. "The European sovereign debt crisis: What have we learned?," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 363-373.

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    More about this item

    Keywords

    Euro equity markets; Country effect; Industry effect; Portfolio diversification; Crisis;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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