The Introduction of the Euro and the Currency Risk Premium

41 Pages Posted: 12 Oct 2006

See all articles by Olasupo Olusi

Olasupo Olusi

Durham University - Centre for Empirical Research in Finance

Antonios Antoniou

Wealth Associates

Krishna Paudyal

Independent

Date Written: August 2006

Abstract

Exchange rates arrangements aim at reducing uncertainty attached to currency fluctuations hence a reduction in systematic risks. This paper analyzes the behaviour of risk premiums in major equity markets, following the introduction of the euro. Using a multifactor asset pricing model, we find exchange rate risk premium in the largest eurozone markets (Germany and France) rose sharply after 1999, unlike in the "smaller" markets (Italy and the Netherlands). Market risk premium declined in the eurozone markets except Germany. It appears the euro resulted in systematic risk reduction in the smaller eurozone markets at the expense of their larger partners. This challenges an important rationale for the euro.

Keywords: Equity Risk Premium, Asset Pricing, the Arbitrage Pricing Theory, Currency Risk

JEL Classification: E44, F31, G12

Suggested Citation

Olusi, Olasupo and Antoniou, Antonios and Paudyal, Krishna N., The Introduction of the Euro and the Currency Risk Premium (August 2006). Available at SSRN: https://ssrn.com/abstract=936902 or http://dx.doi.org/10.2139/ssrn.936902

Olasupo Olusi (Contact Author)

Durham University - Centre for Empirical Research in Finance ( email )

Durham Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom
+44-1913345298 (Phone)
+44-191-3345201 (Fax)

Antonios Antoniou

Wealth Associates ( email )

Alpine House,
Honeypot Lane
London, NW9 9RX
United Kingdom

Krishna N. Paudyal

Independent ( email )

No Address Available

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