Open AccessThe Decline of EMU Core Countries’ Portfolio Equity Investments in the Euro Area: The Role of Stock Return Correlations
Author(s) -
Maela Giofré Giofré
Publication year - 2022
Publication title -
international journal of business and management
Language(s) - English
Resource type - Journals
eISSN - 1833-8119
pISSN - 1833-3850
DOI - 10.5539/ijbm.v17n5p23
Subject(s) - economics , diversification (marketing strategy) , monetary economics , emerging markets , stock (firearms) , financial crisis , equity (law) , portfolio , foreign direct investment , stock market , international economics , business , financial economics , finance , macroeconomics , mechanical engineering , paleontology , horse , marketing , biology , political science , law , engineering
This paper investigates the effect of time-varying stock market correlations on the abrupt and persistent decrease of the reciprocal foreign investments by Euro area member countries after 2007. A strong stock market correlation reduces the diversification opportunities and it may therefore have affected the reciprocal investment by EMU countries. The 2007 represents both the outbreak of the global financial crisis and the beginning of the enlargement process. The two events have had a very different impact on the stock returns’ correlation among EMU members. While the enlargement to new countries has reduced the average returns’ correlation within the Euro area as a whole, the financial crisis and the sovereign debt crisis have led to an increase in stock returns’ correlation among old member states. We find that, among old EMU countries, core countries have been particularly affected by stock returns’ correlation. They reduced their equity investments both in foreign EMU core and in foreign EMU periphery economies after the crisis, with a particularly pronounced contraction witnessed by those country-pairs that displayed highly correlated asset returns. These results highlight the importance of the diversification motive for international portfolio investments and complement the institution-based explanation of the decline of the Euro area investments.