6533b851fe1ef96bd12a8c9c

RESEARCH PRODUCT

The introduction of the Euro and its effects on portfolio decisions

Rainer HaselmannHelmut Herwartz

subject

Transaction costCurrency unionEconomics and EconometricsFinancial economicsInvestment behaviorRealized varianceDiversification (finance)EconomicsPortfolioMarket modelForeign exchange riskFinance

description

Abstract Examining investment behavior related to the Euro introduction, we address the relevance of different investment determinants. With the advent of the currency union two potential sources of portfolio reallocation can be distinguished: First, the diminishment of exchange rate risk and transaction costs within the EMU. Second, the increase of correlation of EMU returns so that diversification benefits decreased. We test for structural breaks in the holdings of German investors and estimate a market model to account for the two effects. A significant decrease in national and an increase in EMU and rest-of-the-world investments can be observed. Comparing the observed holdings with benchmark portfolios, we find that investment home bias has diminished since the Euro introduction.

yearjournalcountryeditionlanguage
2010-02-01Journal of International Money and Finance
https://doi.org/10.1016/j.jimonfin.2009.02.001