Lorenzo Cappiello

The Impact of the Euro on Equity Markets

This paper investigates whether comovements between euro area equity returns at national and industry level have changed after the introduction of the euro. By adopting a regression quantile-based methodology, we find that after 1999 the degree of comovements among euro area national equity markets has augmented. By explicitly controlling for the impact of global factors, we show that this result cannot be explained away by recent world-wide trends. A more refined analysis based on an industry breakdown suggests that the increase in national index comovements is mainly driven by financial, industrials and consumer services sectors. JEL Classification: F36, G15, C22

Uncovered Interest Parity at Long Horizons: Evidence on Emerging Economies

This paper estimates uncovered interest parity (UIP) at long horizons using bilateral US dollar rates vis-a-vis mature economy and emerging market currencies. The paper finds support in favor of UIP for dollar rates vis-a-vis major mature economy currencies, but far less against emerging market currencies. There are also signs that political risk and the exchange risk premium help explain the empirical failure of UIP for these latter currencies. This suggests that whether UIP holds depends more on the currency than on the horizon.

Measuring the Euro Exchange Rate Risk Premium: The Conditional International CAPM Approach

This paper derives measures for the bilateral euro exchange rate risk premia vis-a-vis the US dollar and the UK pound sterling, as well as the US and the UK equity market risk premia using the perspective of a european investor. We carry out the estimations applying the conditional International Capital Asset Pricing Model (ICAPM). The ICAPM is estimated for both constant and time-varying prices of risk, using weekly data on the equity and foreign exchange returns for Europe, the UK and the US. In estimating the time-varying prices of risk, we propose a new set of instrumental variables that take both business cycle and market volatility considerations into account. Consequently, our risk premium estimates are more intuitive, picking up most of the individual events that moved the markets between 1986 and 2001.

Equity Market Integration of New EU Member States

This study assesses the degree of equity market integration for a selected number of new EU member states among themselves and with the euro zone. Within the framework of a factor model for market returns, we adopt an intuitive measure of integration: the higher the amount of return variance explained by the global factor relative to the local components, the higher the degree of integration. Next we derive a relationship between return correlation and the measure of integration. Equity market integration is measured with a regression quantilebased methodology. Evidence suggests that for Czech Republic, Hungary and Poland the degree of integration has increased significantly over the last few years. This is not the case for Cyprus, Estonia, Latvia and Slovenia.