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The euro as a reserve currency for global investors

Author

Listed:
  • Luis M. Viceira

    () (Harvard Business School)

  • Ricardo Gimeno

    () (Banco de España)

Abstract

In this article, we explore the demand for the euro for risk management purposes, and the evidence of stock market integration in the euro area. We define a reserve currency as one that investors demand either because it helps them hedge real interest risk and inflation risk, or because it helps them reduce the volatility of their portfolio of stocks and bonds because its return is negatively correlated with the returns on those assets. This article re-examines the role of the euro as a reserve currency in the sense of Campbell, Viceira and White (2003), updating their evidence, and reviews the evidence of Campbell, Serfaty-de Medeiros and Viceira (2010) in detail. Consistent with the intuition that an integrated capital market is one in which there is a common discount factor pricing securities, we also investigate whether stocks in the euro area have moved from a regime in which national stock markets were priced with discount rates that were predominantly country specific, to a regime in which national stock markets are predominantly priced by a euro area-wide common discount rate. We adopt the beta decomposition approach of Campbell and Vuolteenaho (2004) and Campbell, Polk and Vuolteenaho (2010) to test for capital market integration, and find robust evidence of increased capital market integration in the euro zone, and consequently improved risk sharing among euro zone economies.

Suggested Citation

  • Luis M. Viceira & Ricardo Gimeno, 2010. "The euro as a reserve currency for global investors," Working Papers 1014, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1014
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/10/Fic/dt1014e.pdf
    File Function: First version, May 2010
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    More about this item

    Keywords

    Euro; Reserve Currency; Currency hedging; Market Integration; Beta decomposition;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F15 - International Economics - - Trade - - - Economic Integration
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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