1. 30/04/2008 1 The Euro effect in international asset holdings Barbara Pels Trinity College Dublin Institute of International Integration Studies

2. 30/04/2008 2 Creation of Eurozone -Removes currency risk for within Euro zone asset trade -Creates a more unified financial structure within Eurozone (especially for bonds) => Reduction in information costs and transaction costs for asset trade with(in) Eurozone

3. 30/04/2008 3 Research Questions 1.Do Eurozone countries invest proportionally more in other Eurozone countries? 2.Do non Eurozone countries invest proportionally more in Eurozone?

4. 30/04/2008 4 Do Eurozone countries invest proportionally more in other Eurozone countries? Previous literature: Lane and Milesi-Ferretti (2004) Lane (2006) Aviat and Coeurdacier (2007) Coeurdacier and Martin (2007)

5. 30/04/2008 5 Gravity framework Well known from trade literature Derivation of gravity equation from theoretical model of asset trade: Portes & Rey (2005) Lane & Milesi-Ferretti (2004) Aviat & Coeurdacier (2007) Martin & Coeurdacier (2007) log(Asset) ij = c + log(size i size j ) + log(transaction costs) ij i: source country j: destination country

6. 30/04/2008 6 Compare cross-section over time (2001-2006) log(F) ij = α i + α j + δEMU ij + θX ij + ε ij F ij Bilateral asset holdings (bond/equity)CPIS X ij log(Imports) IMF – Direction of Trade Statistics Distance CEPII EU15 Common coloniser CEPII Common official language CEPII Colonial relationship CEPII Contiguous CEPII

7. 30/04/2008 7 Sample CPIS: Number of source countries: 67 Number of host countries/territories: 220 Time span: 2001-2006 40 offshore centres removed from sample 48 source countries 167 host countries

8. 30/04/2008 8 Econometric issues Bilateral asset holdings: many zero values/ (almost) no negative values Common approaches Add a constant to the bilateral asset holding log(F+1) ij Limit sample to non zero observations Tobit regression (censored regression) Poisson Quasi Maximum Likelihood

9. Bonds: OLS (asset + 1) 30/04/2008 9 Bonds200120022003200420052006 EMU0.900.730.931.001.120.96 (6.22)***(6.08)***(7.20)***(5.07)***(5.91)***(4.85)*** EU152.312.502.272.211.761.79 (11.84)***(13.47)***(11.31)***(9.26)***(7.77)***(7.32)*** log(import)-0.05 -0.04-0.06-0.03 (3.63)***(3.19)***(2.76)***(3.72)***(2.10)** common colonizer0.811.101.300.880.870.70 (3.05)***(4.42)***(2.55)**(2.25)**(2.41)**(1.92)* log(distance)-0.62-0.64-0.74-0.76-0.89-0.82 (9.96)***(8.84)***(9.03)***(9.86)***(11.39)***(9.71)*** colony0.410.360.350.500.240.35 (2.52)**(2.26)**(2.57)**(3.78)***-1.61(2.10)** language0.170.16 0.000.180.11 -1.40-1.21-1.25-0.03-1.47-0.71 contiguous0.350.330.160.130.000.17 (2.05)**-1.63-0.78-0.69-0.03-0.87 Observations353735393668374237143696 R-squared0.78 0.80.790.810.79

10. Equity: OLS (asset + 1) 30/04/2008 10 Equity200120022003200420052006 EMU-0.060.150.070.380.420.31 -0.25-0.64-0.28(2.06)**(2.30)**(1.88)* EU152.421.831.791.961.401.64 (9.35)***(6.40)***(6.28)***(7.12)***(5.30)***(6.66)*** log(import)-0.02-0.04-0.05 -0.03-0.02 -1.03(2.18)**(2.97)***(2.71)***(1.86)*-1.59 common colonizer1.121.231.261.551.101.20 (3.78)***(5.12)***(3.25)***(4.18)***(4.21)***(4.31)*** log(distance)-0.38-0.47-0.60 -0.72-0.79 (5.87)***(6.35)***(7.20)***(7.82)***(8.44)***(9.34)*** colony0.320.490.550.52 0.59 (1.92)*(2.93)***(3.75)***(3.04)***(3.51)***(3.75)*** language0.350.450.330.290.330.26 (2.38)**(2.91)***(2.01)**(1.68)*(2.07)**(1.79)* contiguous1.000.870.950.730.790.49 (5.65)***(4.46)***(4.21)***(3.14)***(3.63)***(2.27)** Observations358235533731384037863728 R-squared0.760.740.760.740.770.78

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15. Euro effect: countries in Eurozone invest disproportionally in other Eurozone countries Is this due to the existence of the European monetary union, or due to other characteristics of Eurozone countries? Test this by assessing 1997 data 30/04/2008 15

16. 30/04/2008 16 Comparison with pre-Euro period 1997BondsEquity EMU0.01-0.466 (-0.66)(2.28)** EU152.8562.192 (16.40)***(8.02)*** log(import)-0.073-0.025 (5.34)***(1.87)* common colonizer0.4390.36 (3.16)***(2.40)** log(distance)-0.487-0.36 (7.60)***(5.23)*** colony0.2560.533 (-1.64)(2.81)*** language-0.030.203 (-0.25)(-1.38) contiguous0.5850.859 (2.87)***(4.22)*** Observations36023653 R-squared0.720.73

17. Euro effect Reduction in transaction costs for intra-Euro area asset trade –Due to elimination of exchange rate risk? –Due to harmonisation of financial structure in the Eurozone? 30/04/2008 17

18. Bonds200120022003200420052006 EMU0.90.6950.8730.9371.0950.941 (3.67)***(2.91)***(3.77)***(3.73)***(4.46)***(3.63)*** EU152.232.3572.0682.0491.5831.651 (10.46)***(11.14)***(10.02)***(9.24)***(7.18)***(7.21)*** Exchange rate volatility-0.373-3.25-6.391-6.613-3.863-3.957 -0.15(4.16)***(2.85)*** (2.12)**-1.47 log(import)-0.059-0.062-0.057-0.064-0.036-0.037 (3.70)***(3.71)***(3.59)***(4.17)***(2.43)**(2.40)** common colonizer0.7661.1131.2010.8730.9430.774 (2.17)**(3.06)***(2.51)**(2.16)**(3.11)***(2.37)** log(distance)-0.662-0.624-0.785-0.787-0.914-0.827 (12.36)***(10.87)***(14.65)***(14.48)***(16.56)***(13.98)*** colony0.410.4250.3590.4750.2320.353 (2.86)***(3.05)***(2.69)***(3.36)***(1.66)*(2.44)** language0.1470.0790.124-0.0490.1370.039 -1.45-0.77-1.26-0.49-1.35-0.35 contiguous0.3240.2820.1190.131-0.0120.179 (1.96)**(1.73)*-0.76-0.79-0.07-1.06 Observations333533583477354835223525 R-squared0.780.790.810.790.810.8 30/04/2008 18

19. Equity200120022003200420052006 EMU-0.0030.1450.0580.3590.4220.33 -0.01-0.6-0.24-1.4(1.69)*-1.26 EU152.371.7421.661.9011.291.603 (11.39)***(8.11)***(7.73)***(8.48)***(5.77)***(6.99)*** Exchange rate volatility2.106-1.812-2.281-0.955-1.5742.361 -0.92(2.26)**-1.01-0.4-0.83-0.89 log(import)-0.018-0.05-0.067-0.059-0.037-0.035 -1.18(2.96)***(4.14)***(3.64)***(2.43)**(2.27)** common colonizer1.1331.2391.2171.531.241.282 (3.65)***(3.69)***(2.78)***(3.83)***(4.03)***(4.26)*** log(distance)-0.413-0.475-0.652-0.646-0.751-0.854 (7.87)***(8.22)***(11.97)***(11.59)***(13.22)***(14.45)*** colony0.340.5590.6020.5350.5420.628 (2.48)**(4.01)***(4.38)***(3.70)***(3.77)***(4.27)*** language0.3320.3970.2770.240.2880.226 (3.36)***(3.86)***(2.77)***(2.35)**(2.80)***(2.02)** contiguous0.980.8370.9180.7260.7790.466 (6.28)***(5.10)***(5.76)***(4.27)***(4.66)***(2.75)*** Observations337533723540364435893558 R-squared0.760.740.770.740.78 30/04/2008 19

20. Euro effect on outsiders 30/04/2008 20 EMEMUEmerging markets EUREMUWider Europe ADVEMUAdvanced economies RWEMURest of world log(F) ij = α i + α j + δ 1 EMU ij + δ 2 EMEMU ij + δ 3 EUREMU ij + δ 4 ADVEMU ij + δ 5 RWEMU ij + θX ij + ε ij

21. 30/04/2008 21 Bonds1997200120022003200420052006 EMU-0.0311.2411.0460.9731.2221.261.561 -0.14(6.45)***(6.95)***(5.45)***(5.51)***(5.11)***(7.16)*** EMEMU-1.308-0.847-0.898-0.961-0.778-0.919-0.182 (4.30)***(2.86)***(4.62)***(3.56)***(3.07)***(3.19)***-0.77 EUREMU-0.1792.1891.7030.9251.331.4422.262 -0.88(7.98)***(6.76)***(4.04)***(3.91)***(4.80)***(7.15)*** ADVEMU1.7581.8342.0431.7212.1791.3582.178 (6.76)***(5.01)***(8.25)***(5.52)***(7.52)***(3.77)***(6.07)*** RWEMU-0.837-1.43-0.497-1.547-0.3470.2180.252 (1.71)*(3.02)***(2.09)**(4.84)***-0.82-0.64-0.71 EU152.7622.1312.3482.0512.0811.5541.741 (20.18)***(9.68)***(11.48)***(8.50)***(8.12)***(6.10)***(6.93)*** log(import)-0.072-0.05-0.047-0.034-0.049-0.024-0.026 (5.39)***(3.65)***(3.00)***(2.42)**(3.43)***(1.85)*(1.79)* common colonizer0.2910.6930.9641.1870.6480.80.543 (2.03)**(2.47)**(3.64)***(2.24)**-1.55(2.20)**-1.45 log(distance)-0.483-0.605-0.614-0.708-0.748-0.856-0.802 (7.49)***(9.53)***(8.40)***(8.49)***(9.64)***(10.68)***(9.12)*** colony0.2140.4310.3520.3530.480.2490.347 -1.43(2.68)***(2.26)**(2.65)***(3.66)***-1.64(2.11)** language0.0210.1440.140.1550.0020.160.085 -0.18-1.2-1.09-1.24-0.01-1.32-0.57 contiguous0.5490.2450.2550.1190.077-0.0140.106 (2.62)***-1.43-1.26-0.58-0.42-0.09-0.58 Observations3602353735393668374237143696 R-squared0.730.79 0.810.80.810.8

22. 30/04/2008 22 Equity1997200120022003200420052006 EMU-1.1250.3790.6370.5490.9430.5770.922 (4.10)***-1.21(2.06)**-1.63(3.43)***(1.89)*(3.51)*** EMEMU-2.347-0.677-0.319-0.2570-0.7660.116 (5.19)***(2.43)**-1.24-0.740-1.65-0.28 EUREMU-1.2051.751.3671.3961.2630.6371.622 (3.82)***(5.17)***(3.96)***(3.51)***(3.18)***-1.54(4.62)*** ADVEMU1.3542.782.8883.0463.692.8073.459 (4.49)***(6.83)***(7.31)***(7.13)***(7.93)***(5.66)***(8.19)*** RWEMU-2.587-1.309-0.424-1.055-0.458-0.137-0.208 (4.95)***(4.72)***(1.85)*(2.88)***(1.97)*-0.32-0.58 EU151.8312.3651.9241.862.1711.421.843 (9.49)***(8.51)***(6.19)***(5.93)***(6.85)***(4.60)***(6.57)*** log(import)-0.025-0.014-0.034-0.046-0.039-0.02-0.015 (1.96)*-0.98(1.97)*(2.76)***(2.36)**-1.47-1.04 common colonizer0.1820.9141.0120.971.2310.9060.977 -1.19(2.86)***(4.04)***(2.47)**(3.22)***(3.31)***(3.39)*** log(distance)-0.361-0.378-0.471-0.593-0.618-0.724-0.784 (5.22)***(5.96)***(6.37)***(7.20)***(7.98)***(8.40)***(9.15)*** colony0.5040.3050.4570.5230.4760.4820.549 (2.83)***(1.92)*(2.79)***(3.66)***(2.75)***(3.38)***(3.40)*** language0.2570.3520.4630.3480.3310.3590.28 (1.81)*(2.47)**(3.04)***(2.15)**(1.94)*(2.32)**(1.92)* contiguous0.80.8870.7910.8680.6460.7260.417 (3.75)***(4.76)***(3.92)***(3.77)***(2.74)***(3.28)***(1.94)* Observations3635358235533731384037863728 R-squared0.750.780.750.780.760.79

23. Conclusion Euro effect for insiders –First evidence that Euro bias in asset holding is due to a one-off change in investment behaviour –Effect stronger for bonds than for equity –Euro effect cannot be explained by the elimination of exchange rate risk in Eurozone Euro effect for outsiders –First indication that Euro effect also affects countries that are not Euro area members –Effect stronger for equity 30/04/2008 23

24. 30/04/2008 24 Thank you

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28. 30/04/2008 28 Comparison other research