Financial Integration, International Portfolio Choice and the European Monetary Union

52 Pages Posted: 16 Mar 2006

See all articles by Roberto A. De Santis

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Bruno Gerard

BI Norwegian Business School - Department of Finance

Date Written: May 2006

Abstract

We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross section of countries over the 1997 to 2001 period. We first argue that financial integration is not a global phenomenon, as equity and bond home biases declined significantly only among European countries, Australia, New Zealand and Singapore. Then, we show that the European Economic and Monetary Union (EMU) eased the access to the equity market and, to a larger extent, the bond market; thereby, enhancing regional financial integration in the euro area. Beside the effect of the EMU, the strongest determinants of the changes in portfolio weights are expected diversification benefits and the initial degree of underweight.

Keywords: Home bias, risk diversification, international portfolio weights, EMU

JEL Classification: C13, C21, F37, G11

Suggested Citation

De Santis, Roberto A. and Gerard, Bruno, Financial Integration, International Portfolio Choice and the European Monetary Union (May 2006). ECB Working Paper No. 626; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=891133

Roberto A. De Santis (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Bruno Gerard

BI Norwegian Business School - Department of Finance ( email )

Nydalsveien 37
Oslo, N-0484
Norway
+4746410506 (Phone)

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