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EMU and Portfolio Diversification Opportunities

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  • Kpate ADJAOUTÉ,

    (Morgan Stanley Capital International, Geneva)

  • Jean-Pierre DANTHINE

    (University of Lausanne, CEPR and FAME)

Abstract

This paper studies the impact of EMU on portfolio diversification opportunities. We find a significant increase in the correlation between stock returns, whether they are computed on the basis of market or sector indices. This is true for two definitions of the pre-convergence and convergence periods. Diversification opportunities within the Euro-area have thus been reduced. The culprit appears to be less the disappearance of currency risk than the convergence of economic structures and/or the homogenisation of economic shocks (across the Euro-15 member states). This evolution should mark the end of pure country allocation strategies within Europe. If these are the alternatives, the increased conformity of stock returns implies that international diversification does not pay: the cost of the home bias within Euroland has been lowered (in some cases to zero). Diversification across both countries and sectors, however, remains the much superior investment strategy, and, in light of this option, the cost of the home bias continues to be significant.

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Bibliographic Info

Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp31.

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Date of creation: Apr 2000
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Handle: RePEc:fam:rpseri:rp31

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Keywords: EMU; portfolio diversification; home bias;

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References

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  1. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  2. 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.
  3. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier.
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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Citations

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Cited by:
  1. Catherine L. Mann & Ellen E. Meade, 2002. "Home Bias, Transaction Costs, and Prospects for the Euro: A More Detailed Analysis," Working Paper Series WP02-3, Peterson Institute for International Economics.
  2. Adjaoute, K. & Danthine, J.P., 2001. "Portfolio Diversification: Alive and well In Euroland," Papers 32, Manitoba - Department of Economics.
  3. Guglielmo Maria Caporale & Burcu Erdogan & Vladimir Kuzin, 2009. "Testing for Convergence in Stock Markets: A Non-Linear Factor Approach," CESifo Working Paper Series 2845, CESifo Group Munich.
  4. Haselmann, Rainer & Helmut, Herwartz, 2005. "The Introduction of the Euro and its Effects on Investment Decisions," Economics Working Papers 2005,15, Christian-Albrechts-University of Kiel, Department of Economics.
  5. Haselmann, Rainer & Herwartz, Helmut, 2010. "The introduction of the Euro and its effects on portfolio decisions," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 94-110, February.
  6. Sinem Derindere Koseoglu & Ali Ozgür Karagülle, 2013. "Portfolio Diversification Benefits In Shipping Industry: A Cointegration Approach," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(2), pages 017-128, December.
  7. Giofré, Maela/M., 2008. "Convergence of EMU Equity Portfolios," MPRA Paper 13927, University Library of Munich, Germany.
  8. Pieterse-Bloem, M., 2011. "The effect of Emu on bond market integration and investor portfolio allocations," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4742837, Tilburg University.
  9. Giofré, Maela/M., 2008. "EMU Effects on Stock Markets: From Home Bias to Euro Bias," MPRA Paper 13926, University Library of Munich, Germany.
  10. Moerman, Gerard A., 2008. "Diversification in euro area stock markets: Country versus industry," Journal of International Money and Finance, Elsevier, vol. 27(7), pages 1122-1134, November.
  11. Colm Kearney & Valerio Poti, 2005. "Correlation Dynamics in European Equity Markets," Finance 0507008, EconWPA.
  12. Kaltenhaeuser, Bernd, 2003. "Country and sector-specific spillover effects in the euro area, the United States and Japan," Working Paper Series 0286, European Central Bank.

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