United we stand divided we fall: The time-varying factors driving European Union stock returns

Shu-hen Chiang, Wen-Chien Liu, Sandy Suardi and Jing Zhao

Journal of International Financial Markets, Institutions and Money, 2021, vol. 71, issue C

Abstract: Much of the literature on the economic benefits of the European Union (EU) has focused on trade liberalization. From a portfolio management perspective, this paper employs a structural vector autoregressive model of the shift-share (SS) decomposition to demonstrate the effects of regional, country, industry, and national industry factors on stock returns. Based on post-EU data for 10 sectors and 19 countries, the relative importance of these factors driving Euro stock returns is found to be time-varying due to financial integration, the global financial crisis, the Euro debt crisis, and Brexit. We find: (1) the EU regional factor dominates the behavior of all EU and non-EU members stock returns; (2) the crises decrease both country and industry factors; (3) the crises have led to greater importance in regional factor characterizing country stock returns especially amongst countries which are more integrated with the EU; (4) national industry factor is more pertinent than the other factors and provides a portfolio’s risk reduction strategy; and (5) the regional factor dominantly explains UK stock returns variation thus generating concerns over Brexit.

Keywords: European Union; Crisis; Regional factor; Country factor; Industry factor (search for similar items in EconPapers)
JEL-codes: F36 G11 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000354

DOI: 10.1016/j.intfin.2021.101316

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