6533b829fe1ef96bd1289725

RESEARCH PRODUCT

Portfolio performance and the Euro: Prospects for new potential EMU members

Rainer HaselmannHelmut Herwartz

subject

Economics and EconometricsUnificationRealized varianceCurrencyDiversification (finance)Equity (finance)EconomicsPortfolioMonetary economicsForeign exchange riskState specificFinance

description

Abstract Entering the EMU removes currency risk for assets originating in the Euro area while diversification opportunities are likely reduced. Taking the perspective of an investor in one of the 12 countries that joined the EU in 2004–2007, we contrast actual optimal composition of international equity holdings against two artificial scenarios: costless hedging against exchange rate risk and presuming the local market to be part of the EMU. State specific optimal portfolios are determined from realized covariances for the period 2000–2006. Optimized risk is found smaller under currency unification and implied Sharp ratios signal significant benefits of EMU participation.

yearjournalcountryeditionlanguage
2008-03-01Journal of International Money and Finance
https://doi.org/10.1016/j.jimonfin.2007.12.006