Did the EMS Reduce the Cost of Capital?

Enrique Sentana

No 2640, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a dynamic APT multi-factor model with time-varying volatility for currency, bond and stock returns for ten European countries over the period 1977-1997. We exploit the cross-sectional dimension of the model to construct world portfolios, which, when added to the original list of assets, allow us to develop simple consistent methods of estimation and testing. Our results reject the implicit asset pricing restrictions, and suggest that decreases in idiosyncratic exchange rate risk tend to lower the cost of capital, although the effect is small. Finally, we assess the potential gains from increased stock market integration.

Keywords: Currency risk; European monetary union; Financial integration; International asset pricing (search for similar items in EconPapers)
JEL-codes: F30 G10 (search for similar items in EconPapers)
Date: 2000-12
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Citations: View citations in EconPapers (4)

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Journal Article: Did the EMS Reduce the Cost of Capital? (2002)
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