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Monetary Unification and the Price of Risk: An Unconditional Analysis

Author

Listed:
  • 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)

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.

Suggested Citation

  • Hans Dewachter & Kristien Smedts & Konstantijn Maes, 2001. "Monetary Unification and the Price of Risk: An Unconditional Analysis," International Economics Working Papers Series wpie006, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
    • Handle: RePEc:kul:kulwps:wpie006
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    multi-country asset pricing model; exchange risk; price of risk conversion;
    All these keywords.

    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; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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