Faculty of Economics and Business Administration Publications Database

The introduction of the Euro and its effects on portfolio decisions

Herwartz, Helmut
Volume: 29
Number: 1
Pages: 94 - 110
Month: February
ISSN-Print: 0261-5606
Link External Source: Online Version
Year: 2010
Keywords: Investment behavior; Home bias; Realized volatility; Euro introduction

Examining investment behavior related to the Euro introduction, we address the relevance of different investment determinants. With the advent of the currency union two potential sources of portfolio reallocation can be distinguished: First, the diminishment of exchange rate risk and transaction costs within the EMU. Second, the increase of correlation of EMU returns so that diversification benefits decreased. We test for structural breaks in the holdings of German investors and estimate a market model to account for the two effects. A significant decrease in national and an increase in EMU and rest-of-the-world investments can be observed. Comparing the observed holdings with benchmark portfolios, we find that investment home bias has diminished since the Euro introduction.