Emu and Portfolio Diversification Opportunities

39 Pages Posted: 13 Nov 2001

See all articles by Kpate Adjaoute

Kpate Adjaoute

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Date Written: October 2001

Abstract

This Paper studies the impact of EMU on portfolio diversification opportunities. We find a significant increase in the correlation between stock returns, whether they are computed on the basis of market or sector indices. This is true for two definitions of the pre-convergence and convergence periods. Diversification opportunities within the euro area have thus been reduced. The culprit appears to be less the disappearance of currency risk than the convergence of economic structures and/or the homogenization of economic shocks (across the Euro-15 member states). This evolution should mark the end of pure country allocation strategies within Europe. If these are the alternatives, the increased conformity of stock returns implies that international diversification does not pay: the cost of the home bias within the euro area has been lowered (in some cases to zero). Diversification across both countries and sectors, however, remains the much superior investment strategy, and, in light of this option, the cost of the home bias continues to be significant.

Keywords: EMU, portfolio diversification, home bias

JEL Classification: F30, G11, G15

Suggested Citation

Adjaoute, Kpate and Danthine, Jean-Pierre, Emu and Portfolio Diversification Opportunities (October 2001). Available at SSRN: https://ssrn.com/abstract=290381

Kpate Adjaoute

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 729 4711 (Phone)
+41 21 729 4711 (Fax)

Jean-Pierre Danthine (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

Lausanne, 1015
Switzerland
+41 21 692 3485 (Phone)
+41 21 692 3335 (Fax)

HOME PAGE: http://www.hec.unil.ch/jdanthine/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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