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Currency Unification: Foreign Exchange Volatility and Equity Returns. A study of the European Union and the effects of the Euro. Agenda. Hypothesis The Euro Zone Methodology Analysis Conclusion Further Analysis. Hypothesis.

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currency unification foreign exchange volatility and equity returns

Currency Unification: Foreign Exchange Volatility and Equity Returns

A study of the European Union and the effects of the Euro

agenda
Agenda
  • Hypothesis
  • The Euro Zone
  • Methodology
  • Analysis
  • Conclusion
  • Further Analysis
hypothesis
Hypothesis
  • A unified currency within a region of countries will reduce currency volatility
  • This should decrease equity market volatility
  • As a result lower equity returns
the euro zone
Austria

Belgium

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

The Euro Zone
methodology obtaining data
Methodology – Obtaining Data
  • Daily currency exchange rates (1970 - 2001)
    • Calculated an average monthly standard deviation of FX rates (proxy for volatility based on daily data)
  • Monthly equity index returns
    • (MSCI local currency)
methodology testing
Methodology – Testing
  • Examined equity return correlations
  • Examined FX correlations
  • Regressed exchange rate deviations (with $US) against local equity returns
methodology perform regressions
Methodology – Perform Regressions
  • Regressed FX std deviations against local returns
  • Performed raw direction count
      • Metrics used – Eurodollar interest rate, world equity returns
methodology forecasts
Methodology - Forecasts
  • Performed out of sample forecast for 1999-2001 samples
  • Calculated conditional volatility using ARCH
conclusion
Conclusion
  • Increasing correlation between Euro-Zone equity Returns
  • Convergence in currency volatilities among countries within the euro zone leading up to ccy unification
  • Unable to prove a robust relation on equity returns with our regressions
    • Perhaps need more variables
further analysis
Further Analysis
  • Equity returns are affected by a number of factors, not solely currency fluctuations
    • Identify other variables eg. Trade, mkt cap etc.
  • Euro introduction was not a distinct radical step in the process of economic unification, the EU has been integrated for years
  • Identify other regions in which FX convergence might occur