The EMU effects on asset market holdings and the recent financial crisis

This paper examines if there are significant integration effects from the establishment of European Monetary Union (EMU) and the introduction of euro on EMU and non-EMU equity and bond markets. This is done by looking at the holdings of these markets. We investigate to what extent these effects have been affected by the recent global financial crisis. This is done based on gravity model determining bilateral asset holding among the EMU countries, non-EMU European countries and the rest of world. This model can control for the effects of other economic (gravity-type) variables on the effects of the EMU on financial markets, like the size of the capital markets across countries, the geographical distance, information asymmetries etc. Ignoring these effects may exaggerate the actual EMU integration effects. The paper provides clear cut evidence that the establishment of the EMU had significant integration effects on equity and bond markets. It significantly increased the EMU bond and equity holdings by the EMU and non-EMU investors. These effects have become important since year 2001. However, they have considerably reduced after year 2007, due to the recent global financial crisis. Across the EMU countries, we have found that the strongest disintegration effects of the above crisis were observed for the peripheral countries of the EMU. These effects became evident before the start of the European debt crisis in early 2010.     

Time varying integration of European stock markets and monetary drivers

This study analyzes time-varying integration of stock markets among fourteen European countries and its monetary drivers relevant to the two contrasting events — the introduction of Euro in 1999 and banking crisis of GIIPS in 2011. Our panel analysis reports evidence that monetary performance convergence, lower differentials in interest rates and inflation among EU countries, has been a key driver for the increase in integration of EU stock markets post EMU. Our qualitative analysis indicates that post EMU, the GDP differences among the EU countries have reverse relations with monetary performance convergence. This finding is in line with those of our quantitative study with a price-based indicator for integration.     

The Euro and European financial market dependence

A time-varying copula model is used to investigate the impact of the introduction of the Euro on the dependence between 17 European stock markets during the period 1994–2003. The model is implemented with a GJR-GARCH-MA-t model for the marginal distributions and the Gaussian copula for the joint distribution, which allows capturing time-varying, non-linear relationships. The results show that, within the Euro area, market dependence increased after the introduction of the common currency only for large equity markets, such as in France, Germany, Italy, the Netherlands and Spain. Structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when Euro membership was determined and the relevant information was announced. The UK and Sweden, but not other European countries outside the Euro area, are found to exhibit an increase in equity market co-movement, which is consistent with the interpretation that these countries may be expected to join the Euro in the future.     

German Wage Moderation and European Imbalances: Feeding the Global VAR with Theory

German labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the Euro Area. We investigate this hypothesis quantitatively. We develop a three‐region open economy New Keynesian model with search and matching frictions from which we derive robust sign restrictions for wage bargaining and matching efficiency shocks which we term wage moderation shocks. We impose these restrictions on a Global VAR consisting of Germany and eight EMU countries to identify a wage moderation shock in Germany. Our results show that, although the German current account was significantly affected by wage moderation shocks, their contribution to European current account imbalances was negligible. We conclude that the German labor market reforms cannot be the lone driver of European imbalances.     

International income risk-sharing and the global financial crisis of 2008–2009

We examine the impact of the global financial crisis on the degree of international income and consumption risk-sharing among industrial economies using returns on cross-border portfolio holdings (e.g., debt, equity, FDI). We split the returns from the net foreign holdings as receipts (inflows) and payments (outflows) to investigate which of the two sides exhibited the greater resilience for income risk-sharing during the recent crisis. First, we find that debt delivered better risk-sharing than equity, mainly reflecting the deficit deterioration in EMU countries during the post-crisis period. FDI, by contrast, did not correspond to noticeable risk diversification. Second, separating output shocks into positive and negative components reveals that debt holding receipts (equity liability payments) performed better under negative (positive) realizations of the shock variable. Third, the unwinding of capital flows resulted in a sharp fall in income dis-smoothing via the debt liability channel in the new EU countries.     

The Euro and inflation uncertainty in the European Monetary Union

This paper adopts a time-varying GARCH framework to estimate short-run and steady-state inflation uncertainty in 12 EMU countries, and then investigates their relationship with inflation. The effects of the Euro introduction in 1999 are examined by utilising a dummy variable. Tests for endogenously determined breaks are also employed. We find a considerable degree of heterogeneity across EMU countries in terms of average inflation, its degree of persistence, and both types of uncertainty, whilst the trend component of inflation is generally decreasing. Various breaks in the relationship between inflation and inflation uncertainty are found, frequently well before the Euro introduction.     

Changing integration of EMU public property markets

This paper examines the impact of the European Monetary Union (EMU) on European public property market integration. Results indicate that the property markets are long-run independent and show little evidence of short-run relationships prior to the formation of the EMU. However, the degree of interdependence and the extent of convergence among the largest property markets have intensified substantially after the launch of the Euro as the common currency in January, 1999. Moreover, each of the property markets under consideration is endogenous in that none is found to “dominate” the others toward long-run equilibrium. Short-run results indicate substantial interrelationships among the markets after the adoption of the Euro. Finally, the study shows that stock markets, bond markets, and public property markets follow similar convergence patterns.     

Risk sharing,finance, and institutions in international portfolios

We develop a standard model to show how transaction costs in international investment affect conventional tests of consumption risk sharing, both in a multilateral and a bilateral setting. We implement the tests in a novel international data set on bilateral holdings of equity, bonds, foreign direct investment (FDI) and bank loans. In our data, high foreign capital holdings are associated with international consumption risk sharing as implied by our theory. This is especially true of investment in equity or bonds, but not of foreign direct investment or bank loans. In our model, the implication is that transaction costs are higher for FDI and international loans. The discrepancy could reflect technological differences, but also the prospect of expropriation, perhaps most stringent for FDI or loans. We argue that expropriation risk is endogenous to both the borrower's institutions and its openness to international markets. The detrimental impact of poor institutions is muted in open economies, where the possibility of subsequent exclusion from world markets deters expropriation of foreign capital. We show the implied effects of institutions prevail in both the cross-section of consumption risk sharing and in observed international investment patterns.     

Why Do Firms Hold Cash? Evidence from EMU Countries

This paper investigates the determinants of corporate cash holdings in EMU countries. Our results suggest that cash holdings are positively affected by the investment opportunity set and cash flows and negatively affected by asset's liquidity, leverage and size. Bank debt and cash holdings are negatively related, which supports that a close relationship with banks allows the firm to hold less cash for precautionary reasons. Firms in countries with superior investor protection and concentrated ownership hold less cash, supporting the role of managerial discretion agency costs in explaining cash levels. Capital markets development has a negative impact on cash levels, contrary to the agency view.     

Issue costs in the Eurobond market: The effects of market integration

This study compares the issuance costs of Eurobonds before and after the completion of the Economic and Monetary Union (EMU) in 2002. We find that the introduction of the Euro has significantly reduced the issue cost of Euro-denominated bonds compared to bonds denominated in the legacy currencies. The reduction in issue cost is not due to a decrease in underwriter compensation, but rather to the elimination of underpricing (the difference between the market price after trading commences and the offering price). Underwriter fee has declined substantially after the completion of the EMU, but this decline has been offset by an increase in underwriter spread (the difference between the offering price and the guaranteed price to the issuer), leaving total underwriter compensation unchanged. The EMU is also associated with significant reductions in bond maturity and syndicate size, consistent with its expected effects on liquidity and issue costs in the Eurobond market.     

Transition to the Euro and its impact on country portfolio diversification

By examining the impact of the introduction of the Euro on stock markets and on country diversification within the Eurozone, the evidence does not suggest a high risk to the stock market to justify a risk premium as a result of currency union. Although the Euro market integration has increased inter-country correlations, it does not preclude gains from international diversification, which partially rely on the non-Eurozone countries for an optimal portfolio in a mean-variance framework. Furthermore, the empirical evidence supports that there is a significant stationarity of average correlations over time between pre-Euro and post-Euro periods, and it has improved since the introduction of the Euro. Also, results show that the Euro produced a change in volatility with a different pace within the Eurozone vis-à-vis non-Eurozone countries, to support a direct and opposite relationship between volatility and correlation.     

Have the GIPSI settled down? Breaks and multivariate stochastic volatility models for,and not against,the European financial integration

We investigate the integration of the European peripheral financial markets with Germany, France, and the UK using a combination of tests for structural breaks and return correlations derived from several multivariate stochastic volatility models. Our findings suggest that financial integration intensified in anticipation of the Euro, further strengthened by the EMU inception, and amplified in response to the 2007/2008 financial crisis. Hence, no evidence is found of decoupling of the equity markets in more troubled European countries from the core. Interestingly, the UK, despite staying outside the EMU, is not worse integrated with the GIPSI than Germany or France.     

The impact of distressed economies on the EU sovereign market

Financially distressed economies inside the European Union (EU) are being blamed for producing a general increase in borrowing costs. This article analyzes the channels of default risk transmission within the EU countries using the information content in the sovereign Credit Default Swap (CDS) market. We proceed in two directions. First, we test the existence of cross-border volatility effects between the central and the peripheral EU countries. Second, we explore the effect of distressed economies on the default and risk premium constituents of sovereign default swaps. We show a significant volatility spillover from distressed to central European Economic and Monetary Union (EMU) economies. This causality pattern leads to a significant impact on the default swap risk premia. On average, the risk premium accounts for approximately 42% of central EMU spreads and 56% of the spreads for those countries outside of the EMU. The peripheral risk also affects the default component of central economies, although its impact is lower.     

Weathering the crisis and beyond: perspectives for the Euro area

The Euro area is experiencing a severe and highly complex crisis. It comprises three problem areas: the difficulties of some highly indebted European sovereigns to ascertain funding at palatable cost, the disconcerting fragility of the European banking system and disappointing growth prospects in the Euro area periphery. To make matters even worse, these problems have developed into a systemic crisis of the European Monetary Union (EMU), since observers have apparently developed fundamental doubts over its integrity. To overcome this systemic crisis, it would not be sufficient, if only the stronger Euro area economies provided more solidarity, nor would it be sufficient, if only all of Europe adhered to ironclad budgetary discipline from now on. A European Redemption Pact could be a strong political commitment to the EMU and offer a bridge between the proponents of fiscal discipline and structural reform and those governments advocating more support. This pact would entail two indispensable aspects, the codification of a credible and coherent reform path and a temporary and limited instrument for joint refinancing.     

Equity fund ownership and the cross-regional diversification of household risk

We explore the link between portfolio home bias and consumption risk sharing among Italian regions using household-level information on consumption, income and portfolio holdings. Since equity funds are typically diversified at the national or international level, we use data on equity fund ownership to proxy for regional home bias. Cross-regional patterns of equity fund ownership are qualitatively consistent with simple portfolio theory: regions with more asymmetric business cycles are more diversified because they have higher fund participation rates (the extensive margin of diversification) and higher average holdings of equity funds (diversification’s intensive margin). Also, fund holdings increase with the exposure of non-tradable income components (such as labor or entrepreneurial income) to regional shocks. Finally, interregional consumption risk sharing increases with fund holdings and this effect seems strongest when participation is widespread. Increased equity market participation could substantially improve interregional risk sharing.     

基本养老保险基金投资、股票收益率与股价波动性

以2017—2022年各季度基本养老保险基金投资数据为样本,考察基本养老保险基金投资对股票收益率与股价波动性的影响。结果显示：基本养老保险基金持股比例变化对股票未来收益率有一定预测效应,持股比例增加会加剧股价波动。异质性检验表明,被持股公司规模越大,持股比例变化对股票收益率的影响越不明显,对股价波动性影响的时滞性越强。对于短期持股而言,持股比例增加会加剧股价波动,而对于长期持股而言,持股比例增加有利于稳定股价。鉴于此,应继续推动基本养老保险基金全国统筹,进一步扩大其市场化投资规模、延长投资考核期限,提升基金可持续发展能力。     

History,gravity and international finance

We analyse patterns of bilateral financial investment using data on US holdings of foreign bonds. We document a “history effect” in which holdings seven decades ago continue to influence holdings today. 10–15% of the cross-country variation in US investors' foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit and endogenous learning. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in such currencies. Our findings point to history and path dependence as key sources of financial market segmentation.     

Current account imbalances and financial integration in the euro area

While the current account of the euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries. We distinguish between balances against the euro zone and the rest of the world and examine these for the EU-15 countries. We find that for euro members the net flows follow differences in per-capita incomes, even before the introduction of the euro. Our results show further that with the introduction of the common currency the elasticity with respect to per-capita incomes of net capital flows within the euro area has increased for the members of the euro zone. This increase can neither be observed for the flows between the euro members and the rest of the world nor for the flows between the countries that stayed outside the monetary union and the euro zone. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has led to some financial diversion.     

Dynamic stock market integration driven by the European Monetary Union: An empirical analysis

We examine the influence of the European Monetary Union (EMU) on the dynamic process of stock market integration over the period 2 January 1989–29 May 2003 using a bivariate EGARCH framework with time-varying conditional correlations. We find that there has been a clear regime shift in European stock market integration with the introduction of the EMU. The EMU has been necessary for stock market integration as unidirectional causality was found. Linear systems regression analysis shows that the increase in both regional and global stock market integration over this period was significantly driven in part, by macroeconomic convergence associated with the introduction of the EMU and financial development levels.     

Granger-causality in peripheral EMU public debt markets: A dynamic approach

Our research aims to analyze the possible existence of Granger-causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise Granger-causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of significant increase in Granger-causality between yields on bonds issued by different countries. In the second step, we study the determinants of these episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.