Asset Allocation in the Euro-Zone

Industry or Country Based?

Research output: Working paperDiscussion paperOther research output

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Abstract

We investigate the relative importance of country and industry factors as determinants of international equity returns in the Euro-zone over the period 1990 to 2003.We conduct our analysis from a portfolio performance perspective, using mean-variance spanning and efficiency tests as well as style analysis, and show how to adjust the tests for time varying market wide volatility.Although unconditional analysis over the full sample suggests that country-based or industry-based EMU-wide portfolios provide similar risk-return trade-offs, a rolling window analysis indicates a striking change in the structure of equity returns in the Euro-zone over the last decade.From 1992 to 1998 country-based strategies outperform industry-based strategies: country based strategies offer higher Sharpe ratios and higher diversification potential as indicated by both spanning tests and style analysis.In the preconvergence period, equity returns in the EMU-zone clearly had a country structure.In contrast, after the introduction of the Euro the country outperformance has disappeared, both in terms of mean-variance efficiency and in terms of mimicking abilities.Industry factors and country factors are now equally important.Our findings suggest that following the adoption of the single currency, Euro-zone sector-based strategies, while not dominating country-based strategies, offer similar risk return trade-offs and diversification benefits.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages46
Volume2005-2
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-2

Fingerprint

Industry
Asset allocation
Euro zone
Equity returns
Factors
Mean-variance efficiency
Trade-offs
Style analysis
Risk-return
Relative importance
Sharpe ratio
Time-varying
Single currency
Diversification
Portfolio performance
Diversification benefits
Mean-variance spanning

Keywords

  • International financial markets
  • Mean-variance efficiency
  • Style analysis
  • EMU

Cite this

Eiling, E., Gerard, B., & de Roon, F. A. (2005). Asset Allocation in the Euro-Zone: Industry or Country Based? (CentER Discussion Paper; Vol. 2005-2). Tilburg: Finance.
Eiling, E. ; Gerard, B. ; de Roon, F.A. / Asset Allocation in the Euro-Zone : Industry or Country Based?. Tilburg : Finance, 2005. (CentER Discussion Paper).
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abstract = "We investigate the relative importance of country and industry factors as determinants of international equity returns in the Euro-zone over the period 1990 to 2003.We conduct our analysis from a portfolio performance perspective, using mean-variance spanning and efficiency tests as well as style analysis, and show how to adjust the tests for time varying market wide volatility.Although unconditional analysis over the full sample suggests that country-based or industry-based EMU-wide portfolios provide similar risk-return trade-offs, a rolling window analysis indicates a striking change in the structure of equity returns in the Euro-zone over the last decade.From 1992 to 1998 country-based strategies outperform industry-based strategies: country based strategies offer higher Sharpe ratios and higher diversification potential as indicated by both spanning tests and style analysis.In the preconvergence period, equity returns in the EMU-zone clearly had a country structure.In contrast, after the introduction of the Euro the country outperformance has disappeared, both in terms of mean-variance efficiency and in terms of mimicking abilities.Industry factors and country factors are now equally important.Our findings suggest that following the adoption of the single currency, Euro-zone sector-based strategies, while not dominating country-based strategies, offer similar risk return trade-offs and diversification benefits.",
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Eiling, E, Gerard, B & de Roon, FA 2005 'Asset Allocation in the Euro-Zone: Industry or Country Based?' CentER Discussion Paper, vol. 2005-2, Finance, Tilburg.

Asset Allocation in the Euro-Zone : Industry or Country Based? / Eiling, E.; Gerard, B.; de Roon, F.A.

Tilburg : Finance, 2005. (CentER Discussion Paper; Vol. 2005-2).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Asset Allocation in the Euro-Zone

T2 - Industry or Country Based?

AU - Eiling, E.

AU - Gerard, B.

AU - de Roon, F.A.

N1 - Subsequently published in the Review of Finance (2012) Pagination: 46

PY - 2005

Y1 - 2005

N2 - We investigate the relative importance of country and industry factors as determinants of international equity returns in the Euro-zone over the period 1990 to 2003.We conduct our analysis from a portfolio performance perspective, using mean-variance spanning and efficiency tests as well as style analysis, and show how to adjust the tests for time varying market wide volatility.Although unconditional analysis over the full sample suggests that country-based or industry-based EMU-wide portfolios provide similar risk-return trade-offs, a rolling window analysis indicates a striking change in the structure of equity returns in the Euro-zone over the last decade.From 1992 to 1998 country-based strategies outperform industry-based strategies: country based strategies offer higher Sharpe ratios and higher diversification potential as indicated by both spanning tests and style analysis.In the preconvergence period, equity returns in the EMU-zone clearly had a country structure.In contrast, after the introduction of the Euro the country outperformance has disappeared, both in terms of mean-variance efficiency and in terms of mimicking abilities.Industry factors and country factors are now equally important.Our findings suggest that following the adoption of the single currency, Euro-zone sector-based strategies, while not dominating country-based strategies, offer similar risk return trade-offs and diversification benefits.

AB - We investigate the relative importance of country and industry factors as determinants of international equity returns in the Euro-zone over the period 1990 to 2003.We conduct our analysis from a portfolio performance perspective, using mean-variance spanning and efficiency tests as well as style analysis, and show how to adjust the tests for time varying market wide volatility.Although unconditional analysis over the full sample suggests that country-based or industry-based EMU-wide portfolios provide similar risk-return trade-offs, a rolling window analysis indicates a striking change in the structure of equity returns in the Euro-zone over the last decade.From 1992 to 1998 country-based strategies outperform industry-based strategies: country based strategies offer higher Sharpe ratios and higher diversification potential as indicated by both spanning tests and style analysis.In the preconvergence period, equity returns in the EMU-zone clearly had a country structure.In contrast, after the introduction of the Euro the country outperformance has disappeared, both in terms of mean-variance efficiency and in terms of mimicking abilities.Industry factors and country factors are now equally important.Our findings suggest that following the adoption of the single currency, Euro-zone sector-based strategies, while not dominating country-based strategies, offer similar risk return trade-offs and diversification benefits.

KW - International financial markets

KW - Mean-variance efficiency

KW - Style analysis

KW - EMU

M3 - Discussion paper

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BT - Asset Allocation in the Euro-Zone

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Eiling E, Gerard B, de Roon FA. Asset Allocation in the Euro-Zone: Industry or Country Based? Tilburg: Finance. 2005. (CentER Discussion Paper).