30/04/2008 1 The Euro effect in international asset holdings Barbara Pels Trinity College Dublin...

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The Euro effect in international asset holdings

Barbara Pels

Trinity College DublinInstitute of International Integration Studies

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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

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Research Questions

1. Do Eurozone countries invest proportionally more in other Eurozone countries?

2. Do non Eurozone countries invest proportionally more in Eurozone?

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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)

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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(sizeisizej) + log(transaction costs)ij

i: source countryj: destination country

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Compare cross-section over time (2001-2006)

log(F)ij = αi + αj + δEMUij + θXij + εij

Fij Bilateral asset holdings (bond/equity) CPIS

Xij log(Imports) IMF – Direction of Trade Statistics

Distance CEPIIEU15Common coloniser CEPIICommon official language CEPIIColonial relationship CEPIIContiguous CEPII

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Sample

CPIS:Number of source countries: 67Number of host countries/territories: 220Time span: 2001-2006

40 offshore centres removed from sample

48 source countries 167 host countries

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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

Bonds: OLS (asset + 1)

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Bonds 2001 2002 2003 2004 2005 2006EMU 0.90 0.73 0.93 1.00 1.12 0.96

  (6.22)*** (6.08)*** (7.20)*** (5.07)*** (5.91)*** (4.85)***EU15 2.31 2.50 2.27 2.21 1.76 1.79

  (11.84)*** (13.47)*** (11.31)*** (9.26)*** (7.77)*** (7.32)***log(import) -0.05 -0.05 -0.04 -0.06 -0.03 -0.03

  (3.63)*** (3.19)*** (2.76)*** (3.72)*** (2.10)** (2.10)**

common colonizer 0.81 1.10 1.30 0.88 0.87 0.70

  (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)***colony 0.41 0.36 0.35 0.50 0.24 0.35

  (2.52)** (2.26)** (2.57)** (3.78)*** -1.61 (2.10)**language 0.17 0.16 0.16 0.00 0.18 0.11  -1.40 -1.21 -1.25 -0.03 -1.47 -0.71

contiguous 0.35 0.33 0.16 0.13 0.00 0.17  (2.05)** -1.63 -0.78 -0.69 -0.03 -0.87

Observations 3537 3539 3668 3742 3714 3696R-squared 0.78 0.78 0.8 0.79 0.81 0.79

Equity: OLS (asset + 1)

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Equity 2001 2002 2003 2004 2005 2006EMU -0.06 0.15 0.07 0.38 0.42 0.31

  -0.25 -0.64 -0.28 (2.06)** (2.30)** (1.88)*EU15 2.42 1.83 1.79 1.96 1.40 1.64

  (9.35)*** (6.40)*** (6.28)*** (7.12)*** (5.30)*** (6.66)***log(import) -0.02 -0.04 -0.05 -0.05 -0.03 -0.02

  -1.03 (2.18)** (2.97)*** (2.71)*** (1.86)* -1.59

common colonizer 1.12 1.23 1.26 1.55 1.10 1.20

  (3.78)*** (5.12)*** (3.25)*** (4.18)*** (4.21)*** (4.31)***log(distance) -0.38 -0.47 -0.60 -0.60 -0.72 -0.79

  (5.87)*** (6.35)*** (7.20)*** (7.82)*** (8.44)*** (9.34)***colony 0.32 0.49 0.55 0.52 0.52 0.59

  (1.92)* (2.93)*** (3.75)*** (3.04)*** (3.51)*** (3.75)***language 0.35 0.45 0.33 0.29 0.33 0.26

  (2.38)** (2.91)*** (2.01)** (1.68)* (2.07)** (1.79)*contiguous 1.00 0.87 0.95 0.73 0.79 0.49

  (5.65)*** (4.46)*** (4.21)*** (3.14)*** (3.63)*** (2.27)**Observations 3582 3553 3731 3840 3786 3728R-squared 0.76 0.74 0.76 0.74 0.77 0.78

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Euro effect - bonds

00.20.40.60.8

11.21.41.61.8

2001 2002 2003 2004 2005 2006

effect EMU dummy

lower bound 95% confidenceintervalupper bound 95% confidenceinterval

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Euro effect - Equity

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

effect EMU dummy

lower bound 95% confidenceintervalupper bound 95% confidenceinterval

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Euro effect - bonds

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006

OLS

No zerosampleTobit

poisson

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Euro effect - equity

-20

0

20

40

60

80

100

120

140

2001 2002 2003 2004 2005 2006

OLS

No zerosampletobitlogc

poisson

• 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

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Comparison with pre-Euro period 1997 Bonds Equity

EMU 0.01 -0.466  (-0.66) (2.28)**EU15 2.856 2.192  (16.40)*** (8.02)***log(import) -0.073 -0.025  (5.34)*** (1.87)*common colonizer 0.439 0.36  (3.16)*** (2.40)**log(distance) -0.487 -0.36  (7.60)*** (5.23)***colony 0.256 0.533  (-1.64) (2.81)***language -0.03 0.203  (-0.25) (-1.38)contiguous 0.585 0.859  (2.87)*** (4.22)***Observations 3602 3653R-squared 0.72 0.73

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?

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Bonds 2001 2002 2003 2004 2005 2006EMU 0.9 0.695 0.873 0.937 1.095 0.941

  (3.67)*** (2.91)*** (3.77)*** (3.73)*** (4.46)*** (3.63)***EU15 2.23 2.357 2.068 2.049 1.583 1.651

  (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)*** (2.85)*** (2.12)** -1.47log(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 colonizer 0.766 1.113 1.201 0.873 0.943 0.774

  (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)***colony 0.41 0.425 0.359 0.475 0.232 0.353

  (2.86)*** (3.05)*** (2.69)*** (3.36)*** (1.66)* (2.44)**language 0.147 0.079 0.124 -0.049 0.137 0.039  -1.45 -0.77 -1.26 -0.49 -1.35 -0.35contiguous 0.324 0.282 0.119 0.131 -0.012 0.179  (1.96)** (1.73)* -0.76 -0.79 -0.07 -1.06Observations 3335 3358 3477 3548 3522 3525R-squared 0.78 0.79 0.81 0.79 0.81 0.8

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Equity 2001 2002 2003 2004 2005 2006

EMU -0.003 0.145 0.058 0.359 0.422 0.33

  -0.01 -0.6 -0.24 -1.4 (1.69)* -1.26

EU15 2.37 1.742 1.66 1.901 1.29 1.603

  (11.39)*** (8.11)*** (7.73)*** (8.48)*** (5.77)*** (6.99)***

Exchange rate volatility 2.106 -1.812 -2.281 -0.955 -1.574 2.361

  -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 colonizer 1.133 1.239 1.217 1.53 1.24 1.282

  (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)***

colony 0.34 0.559 0.602 0.535 0.542 0.628

  (2.48)** (4.01)*** (4.38)*** (3.70)*** (3.77)*** (4.27)***

language 0.332 0.397 0.277 0.24 0.288 0.226

  (3.36)*** (3.86)*** (2.77)*** (2.35)** (2.80)*** (2.02)**

contiguous 0.98 0.837 0.918 0.726 0.779 0.466

  (6.28)*** (5.10)*** (5.76)*** (4.27)*** (4.66)*** (2.75)***

Observations 3375 3372 3540 3644 3589 3558

R-squared 0.76 0.74 0.77 0.74 0.78 0.78

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Euro effect on outsiders

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EMEMU Emerging marketsEUREMU Wider EuropeADVEMU Advanced economiesRWEMU ‘Rest of world’

log(F)ij = αi + αj + δ1EMUij + δ2EMEMUij + δ3EUREMUij + δ4ADVEMUij + δ5RWEMUij + θXij + εij

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Bonds 1997 2001 2002 2003 2004 2005 2006EMU -0.031 1.241 1.046 0.973 1.222 1.26 1.561  -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)*** -0.77EUREMU -0.179 2.189 1.703 0.925 1.33 1.442 2.262  -0.88 (7.98)*** (6.76)*** (4.04)*** (3.91)*** (4.80)*** (7.15)***ADVEMU 1.758 1.834 2.043 1.721 2.179 1.358 2.178  (6.76)*** (5.01)*** (8.25)*** (5.52)*** (7.52)*** (3.77)*** (6.07)***RWEMU -0.837 -1.43 -0.497 -1.547 -0.347 0.218 0.252  (1.71)* (3.02)*** (2.09)** (4.84)*** -0.82 -0.64 -0.71EU15 2.762 2.131 2.348 2.051 2.081 1.554 1.741  (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 colonizer 0.291 0.693 0.964 1.187 0.648 0.8 0.543  (2.03)** (2.47)** (3.64)*** (2.24)** -1.55 (2.20)** -1.45log(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)***colony 0.214 0.431 0.352 0.353 0.48 0.249 0.347  -1.43 (2.68)*** (2.26)** (2.65)*** (3.66)*** -1.64 (2.11)**language 0.021 0.144 0.14 0.155 0.002 0.16 0.085  -0.18 -1.2 -1.09 -1.24 -0.01 -1.32 -0.57contiguous 0.549 0.245 0.255 0.119 0.077 -0.014 0.106  (2.62)*** -1.43 -1.26 -0.58 -0.42 -0.09 -0.58Observations 3602 3537 3539 3668 3742 3714 3696R-squared 0.73 0.79 0.79 0.81 0.8 0.81 0.8

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Equity 1997 2001 2002 2003 2004 2005 2006EMU -1.125 0.379 0.637 0.549 0.943 0.577 0.922  (4.10)*** -1.21 (2.06)** -1.63 (3.43)*** (1.89)* (3.51)***EMEMU -2.347 -0.677 -0.319 -0.257 0 -0.766 0.116  (5.19)*** (2.43)** -1.24 -0.74 0 -1.65 -0.28EUREMU -1.205 1.75 1.367 1.396 1.263 0.637 1.622  (3.82)*** (5.17)*** (3.96)*** (3.51)*** (3.18)*** -1.54 (4.62)***ADVEMU 1.354 2.78 2.888 3.046 3.69 2.807 3.459  (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 -0.58EU15 1.831 2.365 1.924 1.86 2.171 1.42 1.843  (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 -1.04common colonizer 0.182 0.914 1.012 0.97 1.231 0.906 0.977  -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)***colony 0.504 0.305 0.457 0.523 0.476 0.482 0.549  (2.83)*** (1.92)* (2.79)*** (3.66)*** (2.75)*** (3.38)*** (3.40)***language 0.257 0.352 0.463 0.348 0.331 0.359 0.28  (1.81)* (2.47)** (3.04)*** (2.15)** (1.94)* (2.32)** (1.92)*contiguous 0.8 0.887 0.791 0.868 0.646 0.726 0.417  (3.75)*** (4.76)*** (3.92)*** (3.77)*** (2.74)*** (3.28)*** (1.94)*

Observations 3635 3582 3553 3731 3840 3786 3728R-squared 0.75 0.78 0.75 0.78 0.76 0.79 0.79

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

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Thank you

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Comparison other research