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The Impact of Euro on Sectoral Equity Returns and Portfolio Risk

  • Maher Asal

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    This paper examines the implications of the adoption of the euro and the resulting monetary policy integration for investors in the Euro area in terms of stock market diversification. In particular, we study the difference between investment strategies based on country indices and on sector indices. In addition, we use GARCH-M to model return and volatility for the daily sectoral euro equity indices from 1992 to 2009 to analyze how and to what extent volatility in the sector equity index is driven by shocks occurring in the US, aggregate European equity index, aggregate Euro Zone equity index, and the global equity index. We find strong evidence that diversification over sectors yields more efficient portfolios than diversification over countries and that the volatility spillover of the aggregated Euro zone equity return index on the sectoral equity return index has increased after the launch of the euro. Copyright International Atlantic Economic Society 2011

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    File URL: http://hdl.handle.net/10.1007/s11294-011-9292-5
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    Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

    Volume (Year): 17 (2011)
    Issue (Month): 2 (May)
    Pages: 119-133

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    Handle: RePEc:kap:iaecre:v:17:y:2011:i:2:p:119-133
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    1. Adjaoute, K. & Danthine, J.P., 2001. "Portfolio Diversification: Alive and well In Euroland," Papers 32, Manitoba - Department of Economics.
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    8. Bill B. Francis & Iftekhar Hasan & Delroy M. Hunter, 2004. "Return-volatility linkages in the international equity and currency markets," Finance 0405022, EconWPA.
    9. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
    10. Haselmann, Rainer & Herwartz, Helmut, 2008. "Portfolio performance and the Euro: Prospects for new potential EMU members," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 314-330, March.
    11. Balli, Faruk & Ozer-Balli, Hatice, 2009. "Sectoral Equity Returns in the Euro Region: Is There any Room for Reducing the Portfolio Risk?," MPRA Paper 14554, University Library of Munich, Germany.
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