The Geography of Asset Trade and the Euro: Insiders and Outsiders

36 Pages Posted: 27 Jun 2007

See all articles by Nicolas Coeurdacier

Nicolas Coeurdacier

ESSEC Business School - Finance Department

Philippe Martin

Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques

Date Written: January 2007

Abstract

This paper analyzes the determinants of cross-border asset trade on cross-country data and a Swedish data set. We focus our analysis on the effect of the euro for the determinants of bond trade, equity and banking assets. With the help of a theoretical model, we attempt to disentangle the different effects that the euro may have had on asset holdings for both euro zone countries and countries outside of the euro zone such as Sweden. We find evidence that the euro has implied 1) a unilateral financial liberalization which makes it cheaper for all countries to buy euro zone assets. For bonds and equity holdings, this would translate into approximately 14% and 17% decrease in transaction costs. Using Swedish data, we find that this effect of the euro is larger for flows than for stocks. 2) a preferential financial liberalization which on top of the previous effect has decreased transaction costs inside the euro zone by approximately 17% and 10% for bonds and equity respectively. 3) a diversion effect due to the fact that lower transaction costs inside the euro zone have led euro countries to purchase less equity from outside the euro zone. Our empirical analysis also suggests that the elasticity of substitution between bonds inside the euro zone is higher than between bonds denominated in different currencies. We illustrate this effect for transaction costs generated by the difference in the legal system.

Keywords: Euro, gravity equation, international asset trade

JEL Classification: F30, F36, F41, G11

Suggested Citation

Coeurdacier, Nicolas and Martin, Philippe, The Geography of Asset Trade and the Euro: Insiders and Outsiders (January 2007). CEPR Discussion Paper No. 6032. Available at SSRN: https://ssrn.com/abstract=996825

Nicolas Coeurdacier (Contact Author)

ESSEC Business School - Finance Department ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

Philippe Martin

Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques ( email )

106/112 boulevard de l'Hopital
Paris Cedex 13, 75647
France

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