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Monetary unification and the price of risk: An unconditional analysis

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  • Hans Dewachter
  • Konstantijn Maes
  • Kristien Smedts

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Abstract

In this paper we assess the effects of monetary unification in Europe on the pricing behavior in financial markets and more in particular on excess returns. We use the standard IAPT framework to analyze the role of the exchange rate in separating excess return pricing accross European countries. We find that, already in the decade prior to EMU, exchange rate changes do not (unconditionally) correlate strongly with financial market movements across countries. Consequently elimination of exchange rate variability through monetary unification is not likely to have had major implications for pricing behavior in EMU markets.
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Suggested Citation

  • Hans Dewachter & Konstantijn Maes & Kristien Smedts, 2003. "Monetary unification and the price of risk: An unconditional analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 139(2), pages 276-305, June.
  • Handle: RePEc:spr:weltar:v:139:y:2003:i:2:p:276-305
    DOI: 10.1007/BF02659746
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    References listed on IDEAS

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    1. Ikeda, Shinsuke, 1991. " Arbitrage Asset Pricing under Exchange Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 447-455, March.
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    More about this item

    Keywords

    EMU; risk-sharing; financial integration;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • 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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