IMPACT OF THE EURO ON EUROPEAN PORTFOLIO DIVERSIFICATION

The inception of the euro has led to more transparent pricing of product and valuations of firms. We find evidence that the inception of a single European market has increased the correlation amount country stock markets. While it is generally known that stock return correlations among European countries increased as European barries were reduced during the late 1980s and early 1990s, this study offers a more recent update in light of changes instigated by the inception of the euro. Our results have relevant implications for portfolio managers who use the popular top-down investment approach in Europe in which the country is selected before the industry and company. The top-down approach offers limited diversification benefits. since markets are now more highly integrated as a result of the euro.