From Home Bias to Euro Bias: Disentangling the Effects of Monetary Union on the European Financial Markets

Faruk Balli, Syed Basher and Hatice Balli

MPRA Paper from University Library of Munich, Germany

Abstract: Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification.

Keywords: Financial integration; home bias; Euro bias; transaction costs. (search for similar items in EconPapers)
JEL-codes: F21 F36 G11 G12 (search for similar items in EconPapers)
Date: 2010-04-30
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Journal Article: From home bias to Euro bias: Disentangling the effects of monetary union on the European financial markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:22430

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