The European Single Currency and the Volatility of European Stock Markets
39 Pages Posted: 26 Feb 2002
Date Written: April 2002
This paper analyzes whether the convergence of European economies and the introduction of the euro has produced some effects on European Stock Market volatilities. Using multivariate switching regime models we test this issue for stable European economies, such as Germany and France, and historically unstable stock markets, such as Italy and Spain. As a control sample, we use the world index and the UK stock market. Our results suggest that the introduction of the euro generates a change in the parameter distribution of the German return stochastic process, in particular the volatility has increased and transition probabilities indicate an higher frequency of switching from the low volatility regime to the high volatility regime. Otherwise, as theory suggests, the introduction of the euro has reduced the idiosyncratic volatility and increased the frequency of visiting the low volatility regime for the (historically unstable) Spanish and Italian stock markets. We do not observe the same effects for the world index and the UK stock market returns.
Keywords: Stock market volatility, Euro, Switching Regime Models.
JEL Classification: C32, F30, G10
Suggested Citation: Suggested Citation