1. Currency Unification: Foreign Exchange Volatility and Equity Returns
A study of the European Union and the effects of the Euro

2. Agenda Hypothesis The Euro Zone Methodology Analysis Conclusion
Further Analysis

3. 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

4. The Euro Zone Austria Belgium Finland France Germany Greece Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain

5. Methodology – Obtaining Data
Daily currency exchange rates ( )
Calculated an average monthly standard deviation of FX rates (proxy for volatility based on daily data)
Monthly equity index returns
(MSCI local currency)

6. Methodology – Testing Examined equity return correlations
Examined FX correlations
Regressed exchange rate deviations (with $US) against local equity returns
Examined Equity correlations
We anticipate that a unified currency would increase equity return correlations, as countries’ economies become more integrated
Examined FX Correlations
Reviewed standard deviations between correlations from 1988–2000 for all countries in the euro zone to determine whether deviations decrease over time

7. Methodology – Perform Regressions
Regressed FX std deviations against local returns
Performed raw direction count
Metrics used – Eurodollar interest rate, world equity returns

8. Methodology - Forecasts
Performed out of sample forecast for samples
Calculated conditional volatility using ARCH

9. Analysis- FX

10. Analysis - Equity

11. Analysis - Regressions

12. 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

13. 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
Other factors affecting equity returns include;
Intro costs associated with euro intro, systems upgrades, etc that might decrease company earnings
Pricing pressure due to transparency within the integrated markets