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Transition to the Euro and its impact on country portfolio diversification

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  • Smimou, K.
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    Abstract

    By examining the impact of the introduction of the Euro on stock markets and on country diversification within the Eurozone, the evidence does not suggest a high risk to the stock market to justify a risk premium as a result of currency union. Although the Euro market integration has increased inter-country correlations, it does not preclude gains from international diversification, which partially rely on the non-Eurozone countries for an optimal portfolio in a mean-variance framework. Furthermore, the empirical evidence supports that there is a significant stationarity of average correlations over time between pre-Euro and post-Euro periods, and it has improved since the introduction of the Euro. Also, results show that the Euro produced a change in volatility with a different pace within the Eurozone vis-à-vis non-Eurozone countries, to support a direct and opposite relationship between volatility and correlation.

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    Bibliographic Info

    Article provided by Elsevier in its journal Research in International Business and Finance.

    Volume (Year): 25 (2011)
    Issue (Month): 1 (January)
    Pages: 88-103

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    Handle: RePEc:eee:riibaf:v:25:y:2011:i:1:p:88-103

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    Web page: http://www.elsevier.com/locate/ribaf

    Related research

    Keywords: Euro International diversification Volatility Serial correlation stability European stock markets Prospects of the Euro Benefits of monetary union;

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    Cited by:
    1. Cristiana Tudor, 2011. "Changes in Stock Markets Interdependencies as a Result of the Global Financial Crisis: Empirical Investigation on the CEE Region," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(4), pages 525-543, December.
    2. Apergis, Nicholas & Artikis, Panagiotis & Sorros, John, 2011. "Asset pricing and foreign exchange risk," Research in International Business and Finance, Elsevier, vol. 25(3), pages 308-328, September.
    3. Demirer, Riza, 2013. "Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets," Research in International Business and Finance, Elsevier, vol. 29(C), pages 77-98.

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