Sectoral equity returns in the Euro region: Is there any room for reducing portfolio risk?
Abstract Economic integration among Euro members has important consequences for factors driving asset pricing and asset trading within the financial markets. In particular, since the start of the EMU, cross-country equity index correlations in the region have shown upward trends and domestic investors have allocated their portfolios mostly within the region. We study the impact of these recent structural changes on the Euro-wide sectoral equity indices. We model the return and volatility of the Euro sector equity indices between 1992 and 2007. We find that aggregate world equity or global sector equity indices have not affected the sector equity indices since the beginning of the Euro. The aggregate Euro equity index, however, still affects most of the sector equity indices, even though its effect declines remarkably for some sectors. In particular, we find that financial sector equity indices (financial services, insurance, and banking) are being increasingly affected by the aggregate Euro equity index fluctuations observed after the start of the EMU. However, some "basic industry sector" indices, including basic resources, food and beverages, health-care, retail services, oil and gas, and utility become less dependent on the aggregate Euro equity index since the start of the EMU, suggesting that diversification across these sectors within the region would be much more effective for reducing portfolio risk.Research highlights [right triangle, filled] Euro equity bias and the integration of Euro equity markets limits the diversification opportunities. [right triangle, filled] Diversification across Euro sectoral equity indices is more preferable than diversification of the portfolio across Euro nation indices after the start of The Euro. [right triangle, filled] Some sectors are less sensitive to the local shocks in the Euro area. Diversification across these "less sensitive sectors" leads better portfolios according to MPT.
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.:
- Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665 National Bureau of Economic Research, Inc.
- Bekaert, Geert & Harvey, Campbell R., 1997.
"Emerging equity market volatility,"
Journal of Financial Economics,
Elsevier, vol. 43(1), pages 29-77, January.
- Kpaté ADJAOUTE & Jean-Pierre DANTHINE, 2001.
"Portfolio Diversification: Alive and Well in Euroland!,"
FAME Research Paper Series
rp32, International Center for Financial Asset Management and Engineering.
- Kpate Adjaoute & Jean-Pierre Danthine, 2004. "Portfolio diversification: alive and well in Euro-land!," Applied Financial Economics, Taylor & Francis Journals, vol. 14(17), pages 1225-1231.
- Kpate ADJAOUTE & Jean-Pierre DANTHINE, 2001. "Portfolio Diversification: Alive and well in Euroland !," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.08, Université de Lausanne, Faculté des HEC, DEEP.
- Adjaoute, K. & Danthine, J.P., 2001. "Portfolio Diversification: Alive and well In Euroland," Papers 32, Manitoba - Department of Economics.
- Adjaoute, Kpate & Danthine, Jean-Pierre, 2001. "Portfolio Diversification: Alive and Well in Euroland!," CEPR Discussion Papers 3086, C.E.P.R. Discussion Papers.
- Baele, L., 2003.
"Volatility Spillover Effects in European Equity Markets,"
2003-114, Tilburg University, Center for Economic Research.
- Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 373-401, June.
- L. Baele, 2003. "Volatility Spillover Effects in European Equity Markets," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/189, Ghent University, Faculty of Economics and Business Administration.
- Geert Bekaert & Campbell R. Harvey, 2003.
"Market Integration and Contagion,"
NBER Working Papers
9510, National Bureau of Economic Research, Inc.
- Philip Lane & Gian Maria Milesi-Ferretti, 2005. "The International Equity Holdings of Euro Area Investors," The Institute for International Integration Studies Discussion Paper Series iiisdp104, IIIS.
- Hardouvelis, Gikas A & Malliaropoulos, Dimitrios & Priestley, Richard, 1999.
"EMU and European Stock Market Integration,"
CEPR Discussion Papers
2124, C.E.P.R. Discussion Papers.
- Kim, Suk Joong & Moshirian, Fariborz & Wu, Eliza, 2005. "Dynamic stock market integration driven by the European Monetary Union: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2475-2502, October.
- Dušan Isakov & Frédéric Sonney, 2003.
"Are practitioners right? On the relative importance of industrial factors in international stock returns,"
FAME Research Paper Series
rp72, International Center for Financial Asset Management and Engineering.
- Dusan Isakov & Frédéric Sonney, 2004. "Are Practitioners Right? On the Relative Importance of Industrial Factors in International Stock Returns," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 355-379, September.
- 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.
- 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.
- 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.
- Robin Brooks & Marco Del Negro, 2002. "The rise in comovement across national stock markets: market integration or IT bubble?," FRB Atlanta Working Paper 2002-17, Federal Reserve Bank of Atlanta.
- Jobson, J D & Korkie, Bob M, 1981. "Performance Hypothesis Testing with the Sharpe and Treynor Measures," Journal of Finance, American Finance Association, vol. 36(4), pages 889-908, September.
- Balli, Faruk & Basher, Syed Abul & Ozer-Balli, Hatice, 2010.
"From Home Bias to Euro Bias: Disentangling the Effects of Monetary Union on the European Financial Markets,"
22430, University Library of Munich, Germany.
- Balli, Faruk & Basher, Syed Abul & Ozer-Balli, Hatice, 2010. "From home bias to Euro bias: Disentangling the effects of monetary union on the European financial markets," Journal of Economics and Business, Elsevier, vol. 62(5), pages 347-366, September.
- Thomas Kraus, 2001. "The Impact of the EMUon the Structure of European Equity Returns; An Empirical Analysis of the First 21 Months," IMF Working Papers 01/84, .
- Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, vol. 47(1), pages 3-41, March.
- Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
- 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.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Charlotte Christiansen, 2007. "Volatility-Spillover Effects in European Bond Markets," European Financial Management, European Financial Management Association, vol. 13(5), pages 923-948.
- Moerman, Gerard A., 2008. "Diversification in euro area stock markets: Country versus industry," Journal of International Money and Finance, Elsevier, vol. 27(7), pages 1122-1134, November.
When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:63:y::i:2:p:89-106. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.