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Sectoral equity returns in the Euro region: Is there any room for reducing portfolio risk?

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  • Balli, Faruk
  • Balli, Hatice O.

Abstract

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.

Suggested Citation

  • Balli, Faruk & Balli, Hatice O., 2011. "Sectoral equity returns in the Euro region: Is there any room for reducing portfolio risk?," Journal of Economics and Business, Elsevier, vol. 63(2), pages 89-106, March.
  • Handle: RePEc:eee:jebusi:v:63:y::i:2:p:89-106
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    Cited by:

    1. Balli, Faruk & Hajhoj, Hassan Rafdan & Basher, Syed Abul & Ghassan, Hassan Belkacem, 2015. "An analysis of returns and volatility spillovers and their determinants in emerging Asian and Middle Eastern countries," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 311-325.
    2. Balli, Faruk & Balli, Hatice O. & Jean Louis, Rosmy & Vo, Tuan Kiet, 2015. "The transmission of market shocks and bilateral linkages: Evidence from emerging economies," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 349-357.
    3. Yilmaz, Mustafa K. & Sensoy, Ahmet & Ozturk, Kevser & Hacihasanoglu, Erk, 2015. "Cross-sectoral interactions in Islamic equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 32(C), pages 1-20.
    4. Chen, Mei-Ping & Lin, Yu-Hui & Tseng, Chun-Yao & Chen, Wen-Yi, 2015. "Bubbles in health care: Evidence from the U.S., U.K., and German stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 193-205.
    5. Balli, Faruk & Balli, Hatice Ozer & Luu, Mong Ngoc, 2014. "Diversification across ASEAN-wide sectoral and national equity returns," Economic Modelling, Elsevier, vol. 41(C), pages 398-407.
    6. repec:spr:jecfin:v:42:y:2018:i:1:d:10.1007_s12197-017-9387-9 is not listed on IDEAS
    7. Nikolaos Antonakakis & Ioannis Chatziantoniou & George Filis, 2014. "Dynamic Spillovers of Oil Price Shocks and Policy Uncertainty," Department of Economics Working Papers wuwp166, Vienna University of Economics and Business, Department of Economics.
    8. Alam, Nafis & Arshad, Shaista & Rizvi, Syed Aun R., 2016. "Do Islamic stock indices perform better than conventional counterparts? An empirical investigation of sectoral efficiency," Review of Financial Economics, Elsevier, vol. 31(C), pages 108-114.
    9. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2014. "Dynamic spillovers of oil price shocks and economic policy uncertainty," Energy Economics, Elsevier, vol. 44(C), pages 433-447.
    10. Faruk Balli & Hatice O. Balli & Ronglan Hong, 2016. "Spillover effects on the sectoral returns for australian and New Zealand equity markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(3), pages 568-589, July.
    11. Broadstock, David C. & Wang, Rui & Zhang, Dayong, 2014. "Direct and indirect oil shocks and their impacts upon energy related stocks," Economic Systems, Elsevier, vol. 38(3), pages 451-467.

    More about this item

    Keywords

    Stock market correlation Sector equity indices Euro portfolio bias Euro GARCH;

    JEL classification:

    • 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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