From Home Bias to Euro Bias: Disentangling the Effects of Monetary Union on the European Financial Markets

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.Financial integration; home bias; Euro bias; transaction costs.

Sectoral Equity Returns in the Euro Region: Is There any Room for Reducing the Portfolio Risk?

The economic integration among Euro members has important consequences for the factors driving asset pricing and asset trading within the financial markets. In particular, since the start of the Euro, cross-country equity index correlations in the region have showed upward trends and domestic investors have allocated their portfolios mostly inside of the region. This paper studies the impact of these recent structural changes on the Euro-wide sectoral equity indices. We modeled the return and volatility of the Euro sector equity indices between years 1992 and 2007. We documented that aggregate world equity or global sector equity indices have not been affecting the sector equity indices since the beginning of the Euro. Aggregate Euro stock index, however, still has been affecting most of the sector equity indices, even though its effect has been declining remarkably for some sectors. In particular, we found that financial sector indices (financial services, insurance, and banking) are being affected increasingly by the aggregate Euro equity index fluctuations after the start of the Euro. However, some ``basic industry sector'' indices, including basic resources, food and beverage, health-care, retail services, and oil & gas had become less dependent to the aggregate Euro index within the same period, suggesting that diversification across these sectors within the region would be much more effective tool for reducing portfolio risk

Sectoral Equity Returns in the Euro Region: Is There any Room for Reducing the Portfolio Risk?

The economic integration among Euro members has important consequences for the factors driving asset pricing and asset trading within the financial markets. In particular, since the start of the Euro, cross-country equity index correlations in the region have showed upward trends and domestic investors have allocated their portfolios mostly inside of the region. This paper studies the impact of these recent structural changes on the Euro-wide sectoral equity indices. We modeled the return and volatility of the Euro sector equity indices between years 1992 and 2007. We documented that aggregate world equity or global sector equity indices have not been affecting the sector equity indices since the beginning of the Euro. Aggregate Euro stock index, however, still has been affecting most of the sector equity indices, even though its effect has been declining remarkably for some sectors. In particular, we found that financial sector indices (financial services, insurance, and banking) are being affected increasingly by the aggregate Euro equity index fluctuations after the start of the Euro. However, some ``basic industry sector'' indices, including basic resources, food and beverage, health-care, retail services, and oil & gas had become less dependent to the aggregate Euro index within the same period, suggesting that diversification across these sectors within the region would be much more effective tool for reducing portfolio risk

Forecasting airport passenger traffic: the case of Hong Kong International Airport

Hong Kong International Airport is one of the main gateways to Mainland China and the major aviation hub in Asia. An accurate airport traffic demand forecast allows for short and long-term planning and decision making regarding airport facilities and flight networks. This paper employs the Box-Jenkins Autoregressive Integrated Moving Average (ARIMA) methodology to build and estimate the univariate seasonal ARIMA model and the ARIMX model with explanatory variables for forecasting airport passenger traffic for Hong Kong, and projecting its future growth trend from 2011to 2015. Both fitted models are found to have the lower Mean Absolute Percentage Error (MAPE) figures, and then the models are used to obtain ex-post forecasts with accurate forecasting results. More importantly, both ARIMA models predict a growth in future airport passenger traffic at Hong Kong

Windfarms and residential property values

This study examines the effect that windfarm visibility has on residential property values using a hedonic regression model. The study area is Ashhurst, New Zealand, a township of approximately 900 dwellings. Ashhurst is located within eight kilometres of two separate windfarms that were developed between 1998 and 2007 comprising 103x660kW turbines, 31x3MW turbines, and 55x1.65MW turbines. The analysis uses the 945 open market house sales that occurred in Ashhurst between 1995 and 2008. Visual impact of turbines is studied to capture the impact of windfarms and it is assessed using GIS viewshed analysis and by field inspection. The hedonic models had satisfactory explanatory performance and in each case indicated that the turbines located between 2.5 and 6 kilometres from the township of Ashhurst had no significant impact on property value

From Home Bias to Euro Bias: Disentangling the Effects of Monetary Union on the European Financial Markets

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

Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments

We document that the net factor income smoothing channel in OECD countries is primarily driven by net financial asset income, while the other two sub-components (net compensation of employees, net taxes on imports) turn out to be ineffective. Once factor income inflows are distinguished from outflows, empirical evidence suggests a non-significant effect of inflows in terms of income smoothing as opposed to a positive and significant role of factor income outflows (18 percent for the EMU and 16 percent for the EU). Factor income outflows also appear robust with respect to positive output shocks, while neither factor income inflows nor factor income outflows provide insurance against negative output shocks. In terms of the determinants of income smoothing, results indicate that an increase in foreign equity and debt liabilities positively affect the extent of smoothing via factor income outflows. Whereas, contrary to the current literature, an increase in foreign assets holding does not have a positive impact on smoothing via factor income inflows. The tendency of European investors' in allocating a sizeable portion of their assets within the Euro zone is shown to undermine income smoothing