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The relevance of currency risk in the EMU
Authors:Giorgio De Santis  Bruno Grard  Pierre Hillion
Institution:a Goldman Sachs Asset Management, 32 Old Slip, New York, NY 10005, USA;b Department of Financial Economics, Norwegian School of Management—BI, Elias Smiths vei 15, Box 580, N-1302, Sandvika, Norway;c INSEAD and CEPR, Boulevard de Constance, Fontainebleau Cedex, France
Abstract:We investigate how the elimination of intra-European exchange risk may affect international financial markets using a conditional version of the International CAPM. We estimate the EMU and non-EMU components of aggregate currency risk and document significant exposures to both. The premium for EMU risk is positive and associated with exposure to the French, Italian and Spanish currencies. The premium for non-EMU risk is consistently negative and accounts for most of the aggregate currency premiums. In the 1990s, exposures to EMU risk declined significantly while exposures to non-EMU risk increased. Hence the adoption of the Euro is unlikely to have a large impact on aggregate currency risk premiums.
Keywords:International asset pricing  Currency risk  Multivariate GARCH
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