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The introduction of the Euro and its effects on portfolio decisions

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  • Haselmann, Rainer
  • Herwartz, Helmut

Abstract

Examining investment behavior related to the Euro introduction, we address the relevance of different investment determinants. With the advent of the currency union two potential sources of portfolio reallocation can be distinguished: First, the diminishment of exchange rate risk and transaction costs within the EMU. Second, the increase of correlation of EMU returns so that diversification benefits decreased. We test for structural breaks in the holdings of German investors and estimate a market model to account for the two effects. A significant decrease in national and an increase in EMU and rest-of-the-world investments can be observed. Comparing the observed holdings with benchmark portfolios, we find that investment home bias has diminished since the Euro introduction.

Suggested Citation

  • Haselmann, Rainer & Herwartz, Helmut, 2010. "The introduction of the Euro and its effects on portfolio decisions," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 94-110, February.
  • Handle: RePEc:eee:jimfin:v:29:y:2010:i:1:p:94-110
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    Cited by:

    1. Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1659-1675.
    2. Smimou, K. & Khallouli, W., 2015. "Does the Euro affect the dynamic relation between stock market liquidity and the business cycle?," Emerging Markets Review, Elsevier, vol. 25(C), pages 125-153.
    3. repec:eee:jimfin:v:85:y:2018:i:c:p:145-162 is not listed on IDEAS
    4. Jonathan Batten & Xuan Vinh Vo, 2010. "The determinates of equity portfolio holdings," Applied Financial Economics, Taylor & Francis Journals, vol. 20(14), pages 1125-1132.
    5. Dewandaru, Ginanjar & Masih, Rumi & Masih, A. Mansur M., 2016. "What can wavelets unveil about the vulnerabilities of monetary integration? A tale of Eurozone stock markets," Economic Modelling, Elsevier, vol. 52(PB), pages 981-996.
    6. Axel Grossmann & Emiliano Giudici & Marc Simpson, 2014. "Euro conversion and return dynamics of European financial markets: a frequency domain approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(1), pages 1-26, January.
    7. Gajewski, Krzysztof & Olszewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech & Tchorek, Grzegorz & Zięba, Jolanta, 2012. "Integracja finansowa w Europie po wprowadzeniu euro. Przegląd literatury
      [Financial integration in Europe after the introduction of the euro. A literature overview]
      ," MPRA Paper 42482, University Library of Munich, Germany.
    8. Hornuf, Lars & Engert, Andreas, 2013. "Can Network Effects Impede Optimal Contracting in Debt Securities?," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79867, Verein für Socialpolitik / German Economic Association.
    9. Ersal-Kiziler, Eylem & Nguyen, Ha, 2016. "Euro currency risk and the geography of debt flows to peripheral EMU," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 1-20.

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