The Geography of Asset Trade and the Euro: Insiders and Outsiders

Nicolas Coeurdacier and Philippe Martin

No DR 06020, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: This paper analyzes the determinants of cross-border asset trade on cross-country data and a Swedish data set. We focus our analysis on the impact of the euro for the determinants of bond trade, equity and banking assets. With the help of a theoretical model, we attempt to disentangle the different effects that the euro may have had on asset holdings for both euro zone countries and countries outside of the euro zone such as Sweden. We find evidence that the euro has implied 1) a unilateral financial liberalization which makes it cheaper for all countries to buy euro zone assets. For bonds and equity holdings, this would translate into approximately 14% and 17% decrease in transaction costs. Using Swedish data, we find that this effect of the euro is larger for flows than for stocks. 2) a preferential financial liberalization which on top of the previous effect has decreased transaction costs inside the euro zone by approximately 17% and 10% for bonds and equity respectively. 3) a diversion effect due to the fact that lower transaction costs inside the euro zone have led euro countries to purchase less equity from outside the euro zone. Our empirical analysis also suggests that the elasticity of substitution between bonds inside the euro zone is higher than between bonds denominated in different currencies. We illustrate this effect for transaction costs generated by the difference in the legal system.

Keywords: Euro; Gravity Equation; International Asset Trade (search for similar items in EconPapers)
JEL-codes: F30 F36 F41 G11 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2006-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Chapter: The Geography of Asset Trade and the Euro: Insiders and Outsiders (2009)
Journal Article: The geography of asset trade and the euro: Insiders and outsiders (2009)
Working Paper: The geography of asset trade and the euro: insiders and outsiders (2009)
Working Paper: The geography of asset trade and the euro: insiders and outsiders (2009)
Working Paper: The geography of asset trade and the euro: insiders and outsiders (2007)
Working Paper: The Geography of Asset Trade and the Euro: Insiders and Outsiders (2007)
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