از بایاس خانه تا تمایل یورو: رفع ابهام در مورد اثرات اتحادیه پولی در بازارهای مالی اروپا

Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification.

In the 1990s, a financial phenomenon that puzzled economists is why investors hold so much of their wealth in domestic equity rather than investing in an internationally diversified portfolio. Since the benefits of international diversification are well-known,1 it therefore appeared as puzzling when French and Poterba (1991) observed very high domestic ownership of shares in the world’s five largest stock markets: the United State (92.2%), Japan (95.7%), the United Kingdom (92%), Germany (79%) and France (89.4%). Since then, a large number of academic papers have been written explaining the portfolio home bias puzzle – see Lewis (1999) and Karolyi and Stulz (2003) for excellent surveys of the home bias literature.2 In recent years, however, portfolio home bias has notably decreased. For instance, measuring portfolio home bias on a 0–1 scale, where 1 equals complete home bias and 0 equals no home bias, Sørensen, Wu, Yosha, and Zhu (2007) demonstrated that, from 1993 to 2003, average debt (equity) home bias in 24 OECD countries declined from 0.63 (0.83) to 0.52 (0.67). Particularly in the Euro area, debt home bias declined for all countries; while, with the exception of Greece, equity home bias declined for all Euro countries. Fig. 1 and Fig. 5 of the present paper, respectively, provide visual evidence of rising foreign debt and equity holdings to GDP ratio for all Euro member countries. Although portfolio home bias has declined among the Euro countries, a deeper inspection of the geographical patterns of international portfolio holdings reveal that Euro countries have been disproportionately investing in Euro originated assets over the assets originated from non-Euro countries. In other words, Euro investors have shown a strong preference for intra-Euro portfolios than international portfolios. This anomaly has in turn gave rise to a new bias, which now is known as portfolio Euro bias. 3 Fig. 2 and Fig. 6 confirm this assertion. Contributions of Euro debt and equity in Euro members’ foreign portfolios have risen quite remarkably over the past years. Answers to the questions of why the switch from home bias to Euro bias and what economic factors contributed to this switch are related to each other. In the past, foreign portfolio investment was considered risky because seldom investors had required information on foreign portfolios. With the launch of the Euro in 1999, the information problem has been significantly lessened. Besides the information asymmetry, the pace of foreign portfolio investment was often thwarted by numerous other classical factors such as exchange rate risk, interest rate risk or inflation risk. With the introduction of the common currency in 1999, these obstacles became obsolete overnight.4 The notion of psychological barriers to international diversification that once prevailed among investors had disappeared, and money started to travel across borders more rapidly than ever before (see, among others, Adjaouté et al., 2000,De Santis, 2006). One of the purposes for the creation of the Euro zone was the promotion of large and liquid Euro bond and equity markets that could increase the availability of liquid instruments to Euro zone investors. Indeed, the integration in European financial markets has brought a surge in cross-border trading. For example, competition among Euro area governments has led to increasing liquidity of government securities and larger volumes of outstanding issues. Likewise, the Euro area has witnessed an unprecedented boom of corporate bond issuance. Furthermore, the arrival of the Euro had a significant (negative) impact on the underwriting fees of international corporate bonds issued in the new currency.5 In the equity markets, the total number of initial public offerings (IPOs) and their volume surpassed that of the U.S. and Japan for the first time during 1999–2000,6 although the trend partly reversed in 2001 and 2002 in the midst of a global decrease both in volume and number of IPOs (Hartmann, Maddaloni, and Manganelli (2003). These developments have led to a reduction in home bias as investors were eager to benefit from the improved diversification and liquidity within the Euro area. The transition from the decline in portfolio home bias to the rise in portfolio Euro bias has not gone unnoticed in the literature. Adjaouté et al. (2000) provided one of the earliest assessments of the Euro area’s securities market. Unsurprisingly, the authors noticed that the disappearance of currency risk in itself had not completely eliminated the existing home bias, but they acknowledged that the range of initiatives taken by European policy makers would foster future intra-Euro investments. Adam, Jappelli, Menichini, Padula, and Pagano (2002) and Baele, Ferrando, Hördahl, Krylova, and Monnet (2004) conducted very detailed and systematic analysis of the state and evolution of financial integration in the Euro area. In particular, they devised a methodological framework to study the level of financial integration in five key Euro area markets: money, corporate bond, government bond, credit and equity markets. One of the findings of Baele et al. (2004) is that the bond markets achieved a very high degree of integration, indicating a reduction in the home bias of bond portfolios (both government and corporate bonds) in the Euro area. Similar reduction in equity home bias in the Euro area has also been observed, albeit to a lesser extent. Similar to Sørensen et al. (2007) and Foad (2008) observes very sharp drop in intra-Euro equity holdings, with home bias falling from 68% to 29% between the pre- and post-Euro periods. Both Lane and Milesi-Ferretti (2007) and Giofré (2008) document the equity Euro bias phenomenon; for the former, the trade channel seems to drive the equity Euro bias, while the latter finds evidence of the financial channel shaping Euro countries’ equity portfolios after integration. Our objectives in this paper are to empirically analyze the relevant economic factors at play behind the switch from home bias to Euro bias over the periods 1997 and 2001–2007. In so doing, we run bilateral panel regressions comprising 24 OECD countries using a number of variables that are often used in the literature in analyzing the spatial pattern of international portfolio holdings.7 Next, we examine the implications of rising intra-Euro area investment holdings separately on Euro bond markets and on Euro equity markets. A particular feature of this segment of the analysis is the use of more recent observations (i.e. 1997–2009), which allow us to examine the impact of the recent financial turmoil on the Euro area’s financial markets. We wanted to find out in what ways Euro area bond and equity markets have evolved following the transition from home bias to Euro bias. Our main findings can be summarized as follows. Consistent with the theoretical predictions, the empirical results show that transaction costs, market capitalization and relative credit default risk play decisive roles in the determination of cross-border asset holdings. We find that within the 24 OECD countries, investors reveal a preference for investing in the Euro bond markets, as indicated by the statistically significant coefficient of the Euro area dummy variable. Expectedly, Euro area investors show a tendency of investing in Euro equity markets with lower transaction costs. Consistent with earlier studies, we also observe a remarkable convergence in government bond yields in the Euro area during the 2001–2007 period. However, we have also noticed a partial breakdown of the convergence process following the financial crisis of 2008–2009. Likewise, the corporate bond markets have also shown clear signs of strain during the recent financial turmoil. Finally, our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification. The rest of the paper is organized as follows. Section 2 presents a two-asset portfolio model explaining international bond holdings issued by two different markets. Section 3 describes the data-set, while Section 4 discusses the main empirical findings. Section 5 evaluates the implication of rising Euro bias on Euro bond and equity markets. Section 6 concludes the paper.

The main objective of this paper is to empirically analyze the transition from the reduction in home bias to the rise in Euro bias as a consequence of the introduction of Euro in 1999. With this objective in mind, we analyze factors at play behind the switch from home bias to Euro bias. All in all, we argue that the rise in Euro bias is, to a large extent, explained by a similarly strong convergence in underlying fundamentals such as the elimination of exchange rate risk, convergence in economic policies (particularly monetary policies) and the restrictions on fiscal policies as outlined in the Stability and Growth Pact. Based on our main empirical analysis, we find that (lower) transaction cost is the leading factor for the attractiveness of bond investment in the Euro area. The substantial decline in bond underwriting costs as well as the reduction in sovereign debt positions of the federal governments led local investors to diversify their debt portfolio mainly within the Euro markets. The results are almost similar for the Euro area equity markets. We also analyze the degree of market integration in the three key Euro area markets: government bond, corporate bond and equity markets. Consistent with earlier studies, we also observe a remarkable convergence in government bond yields in the Euro area during the 2001–2007 period. However, we have also noticed a partial breakdown of the convergence process following the financial crisis of 2008–2009. Likewise, the corporate bond markets have also shown clear signs of strain during the recent financial turmoil. Finally, our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification.