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The Introduction of the Euro and its Effects on Investment Decisions

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Author Info
Haselmann, Rainer
Helmut, Herwartz

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Abstract

In this paper we examine changes on investment decisions induced by the introduction of the Euro. There are two potential sources of portfolio reallocation. First, the introduction of the Euro diminished exchange rate risks within the EMU region, which relieved European investors from currency risk associated with intra-EMU investments. Second, monetary policy has been bundled within one single institution, which increased the correlation of different national stock and bond market returns. We test for structural breaks in the portfolio holdings of German investors and estimate a market model in the latter in order to account for the two described effects. We observe a significant decrease in national and an significant increase in intra-EMU as well as US investments. Therefore, the establishment of the EMU led to a decrease of investment home bias.

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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2005,15.

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Date of creation: 2005
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Handle: RePEc:zbw:cauewp:3829

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Web page: http://www.wiso.uni-kiel.de/econ/

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Related research
Keywords: investment home bias; realized volatility; Euro introduction;

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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