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Monetary unification and the price of risk: An unconditional analysis

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  • Hans Dewachter
  • Konstantijn Maes
  • Kristien Smedts

    ()

Abstract

In this paper we assess the effects of monetary unification in Europe on the pricing behavior in financial markets and more in particular on excess returns. We use the standard IAPT framework to analyze the role of the exchange rate in separating excess return pricing accross European countries. We find that, already in the decade prior to EMU, exchange rate changes do not (unconditionally) correlate strongly with financial market movements across countries. Consequently elimination of exchange rate variability through monetary unification is not likely to have had major implications for pricing behavior in EMU markets.

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File URL: http://hdl.handle.net/10.1007/BF02659746
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Bibliographic Info

Article provided by Springer in its journal Review of World Economics.

Volume (Year): 139 (2003)
Issue (Month): 2 (June)
Pages: 276-305

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Handle: RePEc:spr:weltar:v:139:y:2003:i:2:p:276-305

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Keywords: EMU; risk-sharing; financial integration;

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  1. Gikas A. Hardouvelis & Dimitrios Malliaropulos & Richard Priestley, 2006. "EMU and European Stock Market Integration," The Journal of Business, University of Chicago Press, vol. 79(1), pages 365-392, January.
  2. Solnik, Bruno, 1983. " International Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 38(2), pages 449-57, May.
  3. Huberman, Gur & Kandel, Shmuel, 1987. " Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-88, September.
  4. Jorion, Philippe, 1992. "Term premiums and the integration of the eurocurrency markets," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 17-39, February.
  5. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
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  7. Bekaert, Geert & Hodrick, Robert J, 1992. " Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 467-509, June.
  8. Robert R. Bliss, 1997. "Movements in the term structure of interest rates," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 16-33.
  9. Ikeda, Shinsuke, 1991. " Arbitrage Asset Pricing under Exchange Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 447-55, March.
  10. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December.
  11. Cho, D Chinhyung & Eun, Cheol S & Senbet, Lemma W, 1986. " International Arbitrage Pricing Theory: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 41(2), pages 313-29, June.
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