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Monetary Unification and the Price of Risk: An Unconditional Analysis

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Author Info
Hans Dewachter () (K.U.Leuven and Erasmus University of Rotterdam)
Kristien Smedts () (K.U.Leuven, C.E.S., International Economics)
Konstantijn Maes () (K.U.Leuven, C.E.S., International Economics)

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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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Publisher Info
Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number ces0201.

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Length: 32 pages
Date of creation: Dec 2001
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Handle: RePEc:kul:kulwps:ces0201

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Related research
Keywords: multi-country asset pricing model; exchange risk; price of risk conversion;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!]
  2. Ikeda, Shinsuke, 1991. " Arbitrage Asset Pricing under Exchange Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 447-55, March. [Downloadable!] (restricted)
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  3. Hardouvelis, Gikas A & Malliaropoulos, Dimitrios & Priestley, Richard, 1999. "EMU and European Stock Market Integration," CEPR Discussion Papers 2124, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Stulz, ReneM., 1981. "A model of international asset pricing," Journal of Financial Economics, Elsevier, vol. 9(4), pages 383-406, December. [Downloadable!] (restricted)
  5. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Konstantijn Maes, 2004. "Modeling the Term Structure of Interest Rates: Where Do We Stand?," Research series 200402, National Bank of Belgium. [Downloadable!]
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