The Impact of the Euro on Financial Markets

By Lorenzo Cappiello, Peter Hördahl, Arjan Kadareja, Simone Manganelli. Social Science Research Network, 2006

114 citations recorded by the source corpus.

We assess whether the euro had an impact first on the degree of integration of European financial markets, and, second, on the euro area term structure. We propose two methodologies to measure integration: one relies on time-varying GARCH correlations, and the other one on a regression quantile-based codependence measure. We document an overall increase in co movements in both equity and bond euro area markets, suggesting that integration has progressed since the introduction of the euro. However, while the correlations in bond markets reaches almost one for all euro area countries, co-movements in equity markets are much lower and the increase is limited to large euro area economies only. In the second part of the paper, we focus on the asset pricing implications of the euro. Specifically, we use a dynamic no arbitrage term structure model to examine the risk - return trade-off in the term structure of interest rates before and after the introduction of the euro. The analysis shows that while the average level of term premia seems little changed following the euro introduction, the variability of premia has been reduced as a result of smaller macro shocks during the euro period. Moreover, the macro factors that were found to be important in explaining the dynamics of premia before the introduction of the euro continue to play a key role in this respect also thereafter. JEL Classification: F36, G12, E43, E44, C22

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/10c960e91b9730f130660ab63c2045636206e6d3

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. John O. S. Wilson
2. Phil Molyneux
3. John Goddard
4. Yong Tan
5. F. Mongelli
6. Manouche Tavakoli
7. Sébastien Wälti
8. Fadzlan Sufian

In Finance

1. John O. S. Wilson
2. Phil Molyneux
3. John Goddard
4. Yong Tan
5. F. Mongelli
6. Manouche Tavakoli
7. Sébastien Wälti
8. Hong Liu

Citations in the corpus

• Stock market synchronization and monetary integration (2011, background): “Most of the available evidence relies on mean correlations between national stock market returns, before the creation of the euro and afterwards (Adjaouté and Danthine, 2003, 2004), or on time-varying return correlations (Cappiello et al., 2006).”
• Sovereign Bond Yield Spillovers in the Euro Zone During the Financial and Debt Crisis (2013, unknown): “Similar are the findings of Cappiello et al. (2006) from the perspective of examining the response of bond yields of EMU countries in bad news before and after Euro period.”
• European Economic and Monetary Integration, and the Optimum Currency Area Theory (2008, background): “Cappiello et al. (2006), Gerard (2006), and De Santis and Gérard (2006) also address the relative importance of country and industry factors as determinants of international equity returns.”
• European banking: An overview (2007, background): “Despite a sustained legislative drive at EU level towards the integration and harmonization of financial markets, and despite evidence that money, bond and equity markets are highly integrated (Emiris, 2002; Hartmann et al., 2003; Baele et al., 2004; Manna, 2004; Guiso et al., 2004; Cappiello et al.”