Sectoral equity returns in the Euro region: Is there any room for reducing portfolio risk?

Faruk Balli and Hatice Balli

Journal of Economics and Business, 2011, vol. 63, issue 2, 89-106

Abstract: Economic integration among Euro members has important consequences for factors driving asset pricing and asset trading within the financial markets. In particular, since the start of the EMU, cross-country equity index correlations in the region have shown upward trends and domestic investors have allocated their portfolios mostly within the region. We study the impact of these recent structural changes on the Euro-wide sectoral equity indices. We model the return and volatility of the Euro sector equity indices between 1992 and 2007. We find that aggregate world equity or global sector equity indices have not affected the sector equity indices since the beginning of the Euro. The aggregate Euro equity index, however, still affects most of the sector equity indices, even though its effect declines remarkably for some sectors. In particular, we find that financial sector equity indices (financial services, insurance, and banking) are being increasingly affected by the aggregate Euro equity index fluctuations observed after the start of the EMU. However, some “basic industry sector” indices, including basic resources, food and beverages, health-care, retail services, oil and gas, and utility become less dependent on the aggregate Euro equity index since the start of the EMU, suggesting that diversification across these sectors within the region would be much more effective for reducing portfolio risk.

Keywords: Stock market correlation; Sector equity indices; Euro portfolio bias; Euro; GARCH (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Sectoral equity returns in the Euro region: Is there any room for reducing portfolio risk? (2011)
Working Paper: Sectoral Equity Returns in the Euro Region: Is There any Room for Reducing the Portfolio Risk? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:63:y:2011:i:2:p:89-106

DOI: 10.1016/j.jeconbus.2010.11.001

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