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Sectoral Equity Returns in the Euro Region: Is There any Room for Reducing the Portfolio Risk?

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  • Balli, Faruk
  • Ozer-Balli, Hatice

Abstract

The economic integration among Euro members has important consequences for the factors driving asset pricing and asset trading within the financial markets. In particular, since the start of the Euro, cross-country equity index correlations in the region have showed upward trends and domestic investors have allocated their portfolios mostly inside of the region. This paper studies the impact of these recent structural changes on the Euro-wide sectoral equity indices. We modeled the return and volatility of the Euro sector equity indices between years 1992 and 2007. We documented that aggregate world equity or global sector equity indices have not been affecting the sector equity indices since the beginning of the Euro. Aggregate Euro stock index, however, still has been affecting most of the sector equity indices, even though its effect has been declining remarkably for some sectors. In particular, we found that financial sector indices (financial services, insurance, and banking) are being affected increasingly by the aggregate Euro equity index fluctuations after the start of the Euro. However, some ``basic industry sector'' indices, including basic resources, food and beverage, health-care, retail services, and oil & gas had become less dependent to the aggregate Euro index within the same period, suggesting that diversification across these sectors within the region would be much more effective tool for reducing portfolio risk.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14554.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:14554

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Keywords: Stock Market Correlation; Sector Equity Indices; Euro Portfolio Bias; Euro; GARCH;

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  1. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
  2. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
  3. Francesca Carrieri & Vihang Errunza & Sergei Sarkissian, 2004. "Industry Risk and Market Integration," Management Science, INFORMS, vol. 50(2), pages 207-221, February.
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  5. Brooks, Robin & Del Negro, Marco, 2004. "The rise in comovement across national stock markets: market integration or IT bubble?," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 659-680, December.
  6. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
  7. Geert Bekaert & Campbell R. Harvey, 2003. "Market Integration and Contagion," NBER Working Papers 9510, National Bureau of Economic Research, Inc.
  8. 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.
  9. Kpate ADJAOUTÉ & Jean-Pierre DANTHINE, 2003. "European Financial Integration and Equity Returns: A Theory-Based Assessment," FAME Research Paper Series rp84, International Center for Financial Asset Management and Engineering.
  10. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  11. Ng, Angela, 2000. "Volatility spillover effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 207-233, April.
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Cited by:
  1. Maher Asal, 2011. "The Impact of Euro on Sectoral Equity Returns and Portfolio Risk," International Advances in Economic Research, Springer, vol. 17(2), pages 119-133, May.
  2. Hatice Ozer Balli & Faruk Balli & Rosmy Jean Louis, 2013. "Time-Varying Spillover Effects on Sectoral Equity Returns," International Review of Finance, International Review of Finance Ltd., vol. 13(1), pages 67-91, 03.

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