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Portfolio Choice of Financial Investors and European Business Cycle Convergence – A Panel Analysis for EU Countries

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  • Ansgar Belke
  • Jennifer Schneider

Abstract

We investigate the linkage between business cycle convergence and financial portfolio choice for a panel of 18 EU countries. We construct an index of similarity of financial portfolios which we then put into context with the view that “the financial world” has an impact on business cycles and contributes to business cycle convergence via the consumption-wealth linkage. The model which guides our analysis is the International Asset Pricing Model (IAPM). Portfolios of the 18 EU countries investigated by us turn out to become more similar over time. According to our fixed effects GMM TSLS estimations, similar portfolios contribute to a convergence of business cycles - via a convergence of consumption cycles. This turns out to be especially true for country-pairs that include euro area non-member countries and, thus, have quite different income and wealth structures.

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File URL: http://www.rome-net.org/RePEc/rmn/wpaper/rome-wp-2013-12.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by ROME Network in its series ROME Working Papers with number 201312.

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Length: 22 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:rmn:wpaper:201312

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Web page: http://www.rome-net.org

Related research

Keywords: business cycle convergence; consumption-wealth linkage; International Asset Pricing Model; portfolio choice; panel methods; specialisation index yields;

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  1. Ansgar Belke & Jens Heine, 2007. "On the endogeneity of an exogenous OCA-criterion: specialisation and the correlation of regional business cycles in Europe," Empirica, Springer, vol. 34(1), pages 15-44, March.
  2. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  3. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Research Working Paper 99-07, Federal Reserve Bank of Kansas City.
  4. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, March.
  5. Jiri Slacalek, 2006. "What Drives Personal Consumption?: The Role of Housing and Financial Wealth," Discussion Papers of DIW Berlin 647, DIW Berlin, German Institute for Economic Research.
  6. Robin Brooks & Marco Del Negro, 2002. "The rise in comovement across national stock markets: market integration or IT bubble?," Working Paper 2002-17, Federal Reserve Bank of Atlanta.
  7. Ricardo M. Sousa, 2009. "Wealth Effetcs on Consumption: Evidence from the euro area," NIPE Working Papers 12/2009, NIPE - Universidade do Minho.
  8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  9. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
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