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Did the EMS Reduce the Cost of Capital?

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  • Sentana, Enrique

Abstract

We propose a dynamic APT multi-factor model with time-varying volatility for currency, bond and stock returns for ten European countries over the period 1977-1997. We exploit the cross-sectional dimension of the model to construct world portfolios, which, when added to the original list of assets, allow us to develop simple consistent methods of estimation and testing. Our results reject the implicit asset pricing restrictions, and suggest that decreases in idiosyncratic exchange rate risk tend to lower the cost of capital, although the effect is small. Finally, we assess the potential gains from increased stock market integration.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2640.

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Date of creation: Dec 2000
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Handle: RePEc:cpr:ceprdp:2640

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Related research

Keywords: Currency Risk; European Monetary Union; Financial Integration; International Asset Pricing;

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Cited by:
  1. Dvorak, Tomas & Podpiera, Richard, 2005. "European Union enlargement and equity markets in accession countries," Working Paper Series 0552, European Central Bank.
  2. de los Rios, Antonio Diez, 2009. "Exchange rate regimes, globalisation, and the cost of capital in emerging markets," Emerging Markets Review, Elsevier, vol. 10(4), pages 311-330, December.
  3. Bris, Arturo & Koskinen, Yrjö & Nilsson, Mattias, 2003. "The Euro and Corporate Valuations," Working Paper Series in Economics and Finance 525, Stockholm School of Economics, revised 06 Dec 2003.
  4. Arie Melnik & Doron Nissim, 2004. "Liquidity and Issue Costs in Eurobond Market: The Effects of Market Integration," Money Macro and Finance (MMF) Research Group Conference 2004 48, Money Macro and Finance Research Group.
  5. Antonio Diez de los Rios, 2013. "A New Linear Estimator for Gaussian Dynamic Term Structure Models," Working Papers 13-10, Bank of Canada.
  6. Kearney, Colm & Lucey, Brian M., 2004. "International equity market integration: Theory, evidence and implications," International Review of Financial Analysis, Elsevier, vol. 13(5), pages 571-583.
  7. De Moor, Lieven & Sercu, Piet, 2011. "Country versus sector factors in equity returns: The roles of non-unit exposures," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 64-77, January.
  8. Arie Melnik & Doron Nissim, 2004. "Liquidity and Issue Costs in the Eurobond Market: the Effects of Market Integration," ICER Working Papers 03-2004, ICER - International Centre for Economic Research.
  9. Tomas Dvorak & Chris R. A. Geiregat, 2004. "Are the new and old EU countries financially integrated?," Department of Economics Working Papers 2004-09, Department of Economics, Williams College.
  10. Melnik, Arie & Nissim, Doron, 2006. "Issue costs in the Eurobond market: The effects of market integration," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 157-177, January.
  11. Lieven Moor & Piet Sercu, 2010. "Country v sector effects in equity returns and the roles of geographical and firm-size coverage," Small Business Economics, Springer, vol. 35(4), pages 433-448, November.
  12. Raj Aggarwal & Brian M. Lucey & Cal Muckley, 2004. "Dynamics of Equity Market Integration in Europe: Evidence of Changes over time and with events," The Institute for International Integration Studies Discussion Paper Series iiisdp019, IIIS.

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