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Transition to the Euro and its impact on country portfolio diversification

  • Smimou, K.
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    By examining the impact of the introduction of the Euro on stock markets and on country diversification within the Eurozone, the evidence does not suggest a high risk to the stock market to justify a risk premium as a result of currency union. Although the Euro market integration has increased inter-country correlations, it does not preclude gains from international diversification, which partially rely on the non-Eurozone countries for an optimal portfolio in a mean-variance framework. Furthermore, the empirical evidence supports that there is a significant stationarity of average correlations over time between pre-Euro and post-Euro periods, and it has improved since the introduction of the Euro. Also, results show that the Euro produced a change in volatility with a different pace within the Eurozone vis-à-vis non-Eurozone countries, to support a direct and opposite relationship between volatility and correlation.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0275-5319(10)00036-X
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    Article provided by Elsevier in its journal Research in International Business and Finance.

    Volume (Year): 25 (2011)
    Issue (Month): 1 (January)
    Pages: 88-103

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    Handle: RePEc:eee:riibaf:v:25:y:2011:i:1:p:88-103
    Contact details of provider: Web page: http://www.elsevier.com/locate/ribaf

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