Monetary integration and risk diversification in eu-15 sovereign debt markets

Zusammenfassung

The objective of this paper is to analyze the impact of Monetary Integration on portfolio diversification opportunities in European public debt markets. With this aim, we examine the existence of common trends in daily 10 year sovereign yields for EU-15 countries during the period 1994-2008 by means of using multivariate time series techniques. After the introduction of the euro, although we find evidence of multiple cointegration, the results suggest the existence of more than one common trend for the different yields, and thus, the possibility of risk diversification within EU-15 sovereign debt markets. Furthermore, when we analyze solely EMU countries, we find more evidence of interdependence among them, although we cannot still reject the possibility of risk diversification within this group of countries. These findings have important implications for investors, in terms of diversification benefits in a context of a single currency.