The European Single Currency and the Volatility of European Stock Markets

39 Pages Posted: 26 Feb 2002

See all articles by Monica Billio

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Date Written: April 2002

Abstract

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

Billio, Monica and Pelizzon, Loriana, The European Single Currency and the Volatility of European Stock Markets (April 2002). EFMA 2002 London Meetings; EFA 2002 Berlin Meetings Discussion Paper; GRETA Associati Venezia Working Paper No. 0102. Available at SSRN: https://ssrn.com/abstract=301829 or http://dx.doi.org/10.2139/ssrn.301829

Monica Billio (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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