The Effects of the Introduction of the Euro on the Volatility of European Stock Markets
Università di Milano Bicocca; International Centre for Economic Research (ICER); Center for Economic Research on Pensions and Welfare Policies (CeRP); Fondazione Eni Enrico Mattei (FEEM); Università degli Studi di Milano-Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS)
Bocconi University - Department of Finance
Journal of Banking and Finance, Vol. 26, No. 10, pp. 2047-64, 2002
Have convergence of European economies and introduction of the euro produced some effects on European stock markets? Theory suggests that stabilization of fundamentals should decrease variance of stock returns for historically unstable stock markets. We test this proposition with daily data for the period 1988-1999 and apply a three-regime Markov switching model for the variance-covariance matrix among several stock indices, including the UK and the US. The analysis shows that introduction of the euro, after an initial burst of volatility common to all european stock markets, has indeed stabilized the Spanish and Italian stock markets.
Keywords: present discounted value model, Markov switching model, stock markets, euro
JEL Classification: C32, F30, G10Accepted Paper Series
Date posted: November 1, 2005
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