The Effect of the Euro on Country Versus Industry portfolio Diversification.

The e ec o he Eu o on coun y e sus indus y po olio di e si ica ion Thomas J. Fla in* Na ional Uni e si y o I eland, Maynoo h Abs ac We examine he ela i e bene i s o indus ial e sus geog aphical di e si ica ion in he Eu o zone be o e and a e he in oduc ion o he common cu ency. A p io i, one may expec ha inc eased s ock ma ke co ela ion would p ecipi a e a mo e om geog aphical owa ds indus ial di e si ica ion. We employ he empi ical model o Hes on and Rouwenho s bu show ha adop ing a panel da a app oach is a mo e e icien es ima ion me hod. We ind e idence o a shi in ac o impo ance; om coun y o indus y. Howe e , his is no exclusi e o he Eu o zone bu is also p esen o non-EMU Eu opean coun ies. The e o e, und manage s should pu sue indus ial a he han geog aphical di e si ica ion s a egies. JEL Classi ica ion: F36, G11, G15. Keywo ds: Po olio di e si ica ion, indus y and coun y e ec s, Eu o. * Add ess o co espondence: Dep . o Economics, NUI Maynoo h, Maynoo h, Co. Kilda e, I eland. Tel: + 353 1 7083369, Fax: + 353 1 7083934, Email: homas. la [email protected] 1. In oduc ion A undamen al p inciple o inancial heo y, da ing back o Ma kowi z (1952), is ha po olio di e si ica ion allows an in es o o ea n highe e u ns o each uni o isk and hence leads o g ea e po olio pe o mance. G ubel (1968) and Le y and Sa na (1970) we e among he i s o show ha di e si ica ion ac oss in e na ional asse s inc eased hese bene i s due o hei ela i ely low co ela ion compa ed o hose o domes ic s ocks. Many empi ical pape s ind ha hese bene i s a e s ill p esen despi e inc easing in eg a ion ac oss inancial ma ke s in bo h s ock ma ke s (G aue and Hakansson, 1987; De San is and Ge a d, 1997) and bond ma ke s (Le y and Le man, 1988) and in he ace o ime- a ying co ela ions (Ang and Bekae , 2002). Many au ho s ha e posed he ques ion whe he o no equi alen bene i s can be ob ained om di e si ying po olios ac oss indus ies a he han ac oss na ional bo de s. The ea ly li e a u e p o ided o e whelming e idence ha in e na ional di e si ica ion is be e han indus ial di e si ica ion. G ubel and Fadna (1971) epo ha indus ies wi hin a coun y a e mo e highly co ela ed han indus ies ac oss coun ies. Howe e , Hes on and Rouwenho s (1994,1995) we e among he i s pape s o igo ously add ess his issue. They ocus on Eu opean ma ke s - 12 in o al - and assign each s ock o one o se en indus ial sec o s. Thei main inding was ha he majo i y o di e si ica ion bene i s s em om in e na ional a he han indus ial di e si ica ion. They epo ha on a e age less han 4% o he a ia ion in coun y indexes is a ibu able o hei indus ial composi ion. G i in and Ka olyi (1998) include de eloped non-Eu opean ma ke s as well as some eme ging ma ke s, while allowing o “mo e inely pa i ioned indus ial classi ica ions” bu ind no g ea e impo ance o indus y e ec s in po olio selec ion. Rouwenho s (1999) again ocuses on Eu opean coun ies o e he pos Maas ich T ea y ime pe iod up o Augus 1998 and inds ha he ela i e s eng hs o coun y e ec s is una ec ed by ime and inc eased economic in eg a ion. Mo e ecen s udies ha e been less suppo i e o he iew ha coun y e ec s domina e indus ial sec o al e ec s. B ooks and Ca ao (2000) es ima e he impac o ‘new-economy’ e sus ‘old-economy’ s ocks in po olio di e si ica ion and ind ha he in oduc ion o ‘new-economy’ s ocks inds an inc eased ole o di e si ica ion ac oss indus ial sec o s. Baca e al. (2000) also epo an inc eased ole o sec o al e ec s in de e mining asse e u ns and conclude ha coun y e ec s ha e declined in impo ance. Thei ocus is on he se en 1 la ges wo ld s ock ma ke s so he e o e you may expec ela i ely high le els o in eg a ion. Mo eo e , Ca aglia e al. (2000), using an ex ended sample o coun ies, ag ee wi h his inding and s a e ha o he pu poses o po olio isk educ ion, indus ial ac o s a e mo e impo an han coun y e ec s. Recen s udies on eme ging ma ke s ha e iden i ied a simila pa e n wi h Wang e al. (2003) inding ha indus ial e ec s ha e been signi ican ly mo e impo an han coun y e ec s in Asian ma ke s since a leas 1999. Un il now, s udies ocussing on Eu ope ha e ound ha indus ial composi ion plays a ela i ely mino ole in de e mining coun y co ela ions and ha low co ela ions a e p ima ily due o coun y-speci ic sou ces o e u n a ia ion. This pape ocuses on he de e mina ion o c oss-coun y co ela ion and hence on he op imal po olio di e si ica ion s a egy om he pe spec i e o an in es o om a Eu o zone coun y. In pa icula , we assess he ela i e impo ance o coun y- and indus y-speci ic shocks o he a iabili y o s ock e u ns. The e a e a numbe o legi ima e easons o a e-examina ion o his issue. Fi s ly, om a inancial ma ke s pe spec i e, he e has been su icien change in he in es men landscape o wa an u he in es iga ion. In he a e ma h o he in oduc ion o i e ocably ixed exchange a es be ween membe coun ies on Janua y 1, 1999, a ypical in es o who wan s o hold a po olio wi hou o eign exchange isk has had hei in es men oppo uni y se al e ed signi ican ly. The po olio se has been expanded eno mously as all Eu o zone in es o s may di e si y ac oss in e na ional bo de s be ween pa icipa ing s a es wi hou wo ying abou cu ency luc ua ions. Boda and Reding (1999) ound ha exchange a e isk educes ma ke in eg a ion. O cou se, he magni ude o he bene i s o inc easing he in es men se will be dic a ed by he co ela ions be ween s ocks in hese coun ies. The e a e likely o be la ge isk- e u n bene i s o be eaped i he p e iously obse ed low coun y co ela ions a e main ained. Howe e some o he ex book explana ions o low co ela ion no longe apply o he Eu o zone coun ies, such as di e ences in iscal and mone a y policies. All s a es ha e now ans e ed esponsibili y o mone a y policy om domes ic cen al banks o he Eu opean Cen al Bank (ECB), while he deg ee o iscal au onomy among membe coun ies has also been d ama ically educed. This policy co-o dina ion has led o a subs an ial na owing o in e es a es ac oss he Eu o zone coun ies. We should expec ha inc eased 2 economic in eg a ion would educe he asymme y o esponses o shocks o undamen al a iables. Fu he mo e, ew ins i u ional o legal impedimen s emain. Consequen ly, one migh expec ha c oss-coun y co ela ions would be mainly d i en by di e ences in he indus ial s uc u e o domes ic ma ke s. The e o e, i is easonable o expec ha di e si ica ion ac oss indus ies may be mo e impo an in his new e a, especially since Ca ie i e al. (2004) ind ha inc eased coun y le el in eg a ion does no ule ou indus y-le el segmen a ion. Howe e , he e a e a numbe o ac o s ha could wo k in he opposi e di ec ion. Goe zmann e al. (2002) ind ha episodes o in eg a ion a e no only cha ac e ised by inc eased c oss-coun y co ela ion bu also by an expansion o he in es men oppo uni y se . The la e e ec may o e imp o ed in es men di e si ica ion possibili ies. Ano he compe ing iew comes om F ancis e al. (2002) who show ha abo e a e age le els o cu ency ola ili y leads o inc eased s ock ma ke co ela ion, so i is possible ha he e ec o elimina ing exchange a e a iabili y could esul in lowe co ela ion be ween ma ke s. The adop ion o he Eu o p o ides as nea o a na u al expe imen as you a e likely o ind in inancial economics and allows us o assess he po en ial explana ions o low c oss-coun y co ela ions men ioned abo e. Secondly, om an econome ic iewpoin , we also apply mo e e icien es ima ion echniques o he model han hose usually employed. In pa icula , we o m a panel da a se and show ha pooling he da a and es ima ing a c oss-sec ion o ime se ies eg ession leads o mo e p ecise es ima ion. This allows us o a ach s a is ical as well as economic signi icance o ou esul s and has impo an implica ions o und manage s in making hei decision whe he o pu sue ac i e geog aphical o indus ial di e si ica ion. We ind ha he e has been a shi in impo ance om coun y o indus ial e ec s. In he ea ly yea s o ou sample, ou esul s a e consis en wi h he o he li e a u e ocussing on Eu opean s ock ma ke s; coun y e ec s ou weigh indus ial e ec s. Howe e his esul is e e sed ollowing he in oduc ion o he Eu o. The e o e Eu o zone in es men s a egies would be be e o concen a ing on indus ial a he han geog aphical di e si ica ion. This is consis en wi h inc eased in eg a ion be ween Eu o zone ma ke s a e he adop ion o he single cu ency, which has been documen ed by F a zsche (2001). Howe e , we use a g oup o non- EMU Eu opean coun ies o show ha his esul is no jus con ined o he Eu o zone. 3 The obus ness o ou esul s o he inclusion o hese addi ional ma ke s sugges s ha he decline in impo ance o coun y e ec s may be due o ac o s o he han he in oduc ion o he Eu o. In pa icula , when aken wi h he o he li e a u e, inc eased coun y co ela ions appea o be a global phenomenon. The emainde o he pape is o ganised as ollows. Sec ion 2 e iews he li e a u e on he sou ces o low c oss- coun y co ela ion and analyses whe he hese a e likely o apply wi hin he common cu ency a ea. Sec ion 3 desc ibes he da a while sec ion 4 ou lines he model and discusses i s es ima ion. Ou esul s a e p esen ed in sec ion 5, while conclusions a e con ained in sec ion 6. 2. Sou ces o low c oss-coun y co ela ion Gi en i s impo ance in po olio selec ion models, he sou ces o low c oss- coun y co ela ion o inancial asse e u ns ha e gene a ed a g ea deal o li e a u e. A numbe o common hemes ha e eme ged. Fi s ly, a po en ial explana ion o low co ela ion may be due o low le els o ma ke in eg a ion. In segmen ed o pa ially segmen ed ma ke s local ac o s may be mo e impo an han global ac o s. Wi hou ull in eg a ion, i is possible o obse e p icing di e ences o di e en speeds o p ice adjus men . The e is empi ical e idence o show ha s ock ma ke co ela ion is posi i ely linked o le els o bo h economic and inancial in eg a ion. Fe son and Ha ey (1991) ind a posi i e ela ionship be ween he deg ee o eal and inancial in eg a ion. Bekae and Ha ey (1995) show ha ma ke in eg a ion has a s ong in luence on he co-mo emen o eme ging ma ke e u ns wi h a global ma ke ac o . Fu he mo e, he e is e idence o ma ke in eg a ion inc easing o e ime (De San is and Ge a d, 1997 and Ha dou elis e al., 1999). Reduc ions in ansac ion cos s, ins i u ional and legal impedimen s a e gene ally c edi ed wi h inc easing in eg a ion among de eloped ma ke s. Following he subs an ial poli ical, economic and inancial co-o dina ion wi hin he Eu o zone, s ock ma ke co-mo emen s a e unlikely o be low o lack o ma ke in eg a ion. Howe e , s ock ma ke in eg a ion may s ill be es ic ed by he home bias in equi y po olios displayed by many in es o s (see Lewis, 1999 o a e iew o his opic). One possible explana ion o his phenomenon is ha in es o s a e be e in o med abou domes ic (o egional) ma ke condi ions o hey a e mo e op imis ic 4 abou he u u e pe o mance o domes ic ma ke s (in es o sen imen ). Fla in e al. (2003) show ha geog aphical a iables, which may be a p oxy o hese psychological ba ie s, ha e signi ican explana o y powe o de e mining he le el o s ock ma ke co ela ion. Secondly, ollowing Roll (1992), di e ences in he indus ial composi ion o na ional indices ha e been pu o wa d as an impo an de e minan o c oss-coun y co ela ion. Howe e , mo e ecen empi ical e idence does no suppo his iew. Hes on and Rouwenho s (1994,1995), G i in and Ka olyi (1998) and Fla in e al. (2003) all show ha indus ial composi ion explains li le o s ock ma ke co- mo emen s. Thi dly, economic undamen als and economic shocks may also play a ole in de e mining s ock ma ke co ela ion. Campbell and Hamao (1992) show ha economic undamen als, such as in e es a es and di idend yields, help o explain US and Japanese ma ke co-mo emen . Con e sely, Ka olyi and S ulz (1996) ind li le e idence ha mac oeconomic announcemen s o shocks o exchange a es o in e es a es in luence U.S. and Japanese s ock e u n co ela ions. Amme and Mei (1996) ind ha equi y isk p emia a he han undamen al a iables accoun o mos co- mo emen s ac oss na ional indices. Ob iously, coun y-speci ic shocks will impac on domes ic ma ke e u ns and hence educe co-mo emen s wi h o he ma ke s, bu also global shocks o which ma ke s ha e di e en sensi i i ies may also esul in low c oss-coun y co ela ion. Wi h he co-o dina ion o mone a y a iables wi hin he Eu o zone, he main ocus o ou pape is o examine he ole o economic shocks, he inal explana ion ou lined abo e. In pa icula we seek o assess he ela i e impo ance o coun y- and indus y-speci ic shocks. The deg ee o which such shocks ha e di e en ial c oss- coun y and c oss-indus y e ec s may help o iden i y he op imal di e si ica ion s a egy a ailable o a po olio manage . 3. Da a We use mon hly o al e u ns and ma ke capi alisa ions on 1193 companies ac oss he ele en o iginal membe s o he ‘Eu o zone’. G eece is omi ed om he analysis, as i did no join he EMU on Janua y 1999. A con ol g oup is c ea ed using simila da a o he UK, Swi ze land, Denma k and Sweden. All e u ns a e exp essed in a 5 common cu ency, he Eu o. P e-Eu o e u ns o all ma ke s and pos -Eu o e u ns o he non-EMU coun ies a e compu ed by con e ing om he domes ic cu ency o he Eu o ia he ECU end-o -mon h exchange a e. Ou sample s e ches om Janua y 1995 o Decembe 2002. The s a ing poin was chosen o gi e an equal span be o e and a e he in oduc ion o he Eu o. In his espec , we hope o cap u e changes in op imal di e si ica ion s a egies ha may ha e been induced by he adop ion o he common cu ency. All da a a e collec ed om Da as eam and each company is assigned o an indus ial sec o and a coun y acco ding o he Da as eam classi ica ion. These a e consis en wi h he FTSE indus y sec o s. In his applica ion, we use en b oad indus ial classi ica ions. G i in and Ka olyi (1998) ha e al eady shown ha using e y ine indus y de ini ions does no signi ican ly change he indings. Gi en ha we a e ying o assess he impac o he in oduc ion o he common cu ency, we ha e decided o wo k wi h a balanced panel o companies. Fo he Eu o zone, his lea es us wi h 740 companies. The indus ial and geog aphical b eakdown o hese companies is epo ed in Table 1. I is clea ha he e is a non- uni o m dis ibu ion o companies ac oss indus ial sec o s and especially ac oss geog aphical bounda ies, e.g. Luxembou g has ela i ely ew s ocks and hese end o be concen a ed in he inancial sec o , whe eas Ge many accoun s o almos 20% o he companies in ou sample bu 75% o hese ope a e ou side o he inancial sec o . Table 2 p esen s in o ma ion on he a e age ma ke capi alisa ion o he i ms in ou sample. In pa icula , we epo he a e age p opo ion o he Eu o zone ma ke ha is a ibu able o each coun y and each sec o o e he whole sample. Again we see impo an di e ences ac oss coun ies and indus ial sec o s. In o ma ion echnology s ocks accoun ed o abou 7% o he Eu o zone alue-weigh ed index bu almos 40% o hese we e loca ed in Finland (mainly Nokia). These s ocks ep esen ed o e 60% o he Finnish ma ke . The highes alue weigh s o Ge man s ocks a e in Financials and Indus ial i ms, while F ance has a highe concen a ion o Se ice p o iding companies. Tables 3 and 4 p esen sample co ela ions o he Eu o zone coun ies and indus ies espec i ely. These co ela ions a e compu ed using mon hly e u ns o he p e- and pos -Eu o pe iod. Ini ially, ocusing on he coun y co ela ions, we can see ha he e is signi ican a ia ion be ween he samples. The a e age pai -wise co ela ion alls om 0.679 in he p e-Eu o sample o 0.586 in he pos -Eu o sample. 6 This is coun e -in ui i e gi en ha we would ha e expec ed he co ela ion o ise in ligh o he inc eased in eg a ion wi hin his economic zone. Howe e , his inding is consis en wi h Adjaou é and Dan hine (2004) who a gue ha his could be due o he cyclical na u e o coun y co ela ion. We would equi e an ex ended pos -Eu o sample o e i y his. Ano he po en ial explana ion is ha EMU has c ea ed e en g ea e e u n dispe sion h ough an expansion o he in es men oppo uni y se as sugges ed by Goe zmann e al. (2002), he eby o se ing he in eg a ion e ec wi h new di e si ica ion possibili ies. Al e na i ely, i may be ha he elimina ion o cu ency ola ili y has lowe ed equi y ma ke co ela ion, in line wi h F ancis e al. (2002). The alling a e age co ela ion does mask he ac ha o e 38% (21 ou o 55) o he co ela ions did inc ease. Table 4 con ains he co esponding ma ix o he Eu o zone indus ies. He e we see a ela i ely la ge dec ease in he a e age pai -wise co ela ion, om a p e-Eu o le el o 0.747 o 0.568 in he pos -Eu o sample. A dec ease in co ela ion was eco ded in 38 o he 45 (nea ly 85%) co ela ion coe icien s. I is no ewo hy ha he a e age co ela ion is highe o indus ies han coun ies in he o me ime pe iod and sligh ly lowe in he la e pe iod. This sugges s ha he e may ha e been a ela i e shi o , a leas , con e gence in coun y and indus y e ec s o e he sample. Equi alen co ela ions o he non-EMU sample a e bo h cha ac e ised by inc easing co ela ion. A e age co ela ions ha e inc eased om 0.668 o 0.704 o coun ies and 0.428 o 0.453 o indus ies. I is no iceable ha all pai -wise c oss- coun y co ela ions a e much highe han hose o indus ies. These co ela ions a e p esen ed in Tables 5 and 6. 4. Me hodology Hes on and Rouwenho s (1994) p opose a model o s ock e u n ha is capable o disen angling coun y and indus y e ec s. Solnik and de F ei as (1988) allow o exchange a e e ec s, bu his is clea ly edundan in ou speci ica ion. The e u n o any s ock i ha belongs o indus y j and coun y k is gi en by: . i kji R        (1) 7 In his o mula ion, α ep esen s a common componen o all s ocks, βj cap u es he indus y e ec and γk he coun y e ec . The e o e m, εi, is asse speci ic and is assumed o be ze o mean wi h a ini e a iance. This speci ica ion ules ou any in e ac ion be ween indus y and coun y e ec s. Using ou da a, we ha e companies loca ed in one o ele en coun ies (k = 1 o 11), wi h each belonging o one o en indus ies (j = 1 o 10). We de ine indus y dummies, Iij, o ha e a alue o one i s ock i belongs o indus y j and ze o o he wise. Likewise, coun y dummies, Cik, ake a alue o one i s ock i belongs o coun y k and ze o o he wise. Thus we can e- w i e equa ion (1) o each ime pe iod as ...... 111111101011 i iiiii CCIIR            (2) O cou se, equa ion (2) canno be es ima ed in i s cu en o m as bo h he indus y and coun y dummies sum o uni y, esul ing in pe ec mul icollinea i y be ween he eg esso s. We could p oceed by d opping an a bi a y indus y and coun y and measu ing e e y hing else ela i e o hese. Howe e o po olio manage s, i would be mo e desi able o measu e coun y and indus y e ec s ela i e o some mo e easily iden i iable and accep ed benchma k such as an equally (o alue)-weigh ed index o s ocks. Hes on and Rouwenho s (1994) ollow Sui s (1984) and Kennedy (1986) by es ima ing a cons ained dummy a iable eg ession. In essence, his amoun s o cons aining he weigh ed indus y and coun y e ec s o sum o ze o. Imposing such es ic ions is equi alen o measu ing each indus y ela i e o he a e age i m o in his case a weigh ed po olio o Eu o zone s ocks. I we appo ion he weigh s simply as he numbe o s ocks in each coun y and indus y, hen ou benchma k is an equally weigh ed index.       11 1 10 1 0 ,0 kkk j jj m n   (3) whe e nj and mk ep esen he numbe o i ms in indus y j and coun y k espec i ely. 8 ad oca ed as a bene i o EMU, i could be a gued ha his may accoun o some o he inc ease in impo ance o indus y e ec s wi hin he single cu ency zone. B ooks and Ca ao (2000) a gue ha he inc easing impo ance o he indus y ac o in hei s udy could be due o he In o ma ion Technology sec o . I is gene ally accep ed ha he e was a bubble in his sec o du ing he la e-90’s, being uelled by in e ne companies in he main. Howe e , in ou analysis, we a e dealing wi h a balanced panel and he e o e only include hose s ocks o which a ull his o y om 1995-2002 is a ailable. The e o e he in luence o sho -li ed, mis-p iced companies is g ea ly educed, i no o ally elimina ed. An al e na i e explana ion o he inc eased impo ance o indus y ac o s s ems om he cyclical beha iou o coun y e ec s (Adjaou é and Dan hine, 2004). The decline in coun y ac o s may be empo a y and i so und manage s should be ca e ul abou he absolu e adop ion o indus ial s a egies. P esen ly such s a egies seem o o e be e di e si ica ion possibili ies bu in so a as coun y ac o s a e cyclical, his could be e e sed again. 6. Conclusion The goal o ou pape is o assess he ela i e impo ance o coun y and indus y e ec s in Eu opean po olio di e si ica ion and he impac o he Eu o on his. Many ea lie s udies ha e add essed his issue and gene ally, o Eu opean ma ke s, concluded ha coun y e ec s we e g ea e and consequen ly di e si ica ion along geog aphical lines was mo e impo an o und manage s. Ou mo i a ion o unde aking his analysis is wo- old. Fi s ly, his is he i s s udy o ocus exclusi ely on he Eu o zone ma ke s in he pos -EMU pe iod. The elimina ion o o eign exchange isk li ed ba ie s o in es o s who a e a e se o his isk sou ce and as such p o ided a much-expanded ‘domes ic’ ma ke . The adop ion o a common mone a y policy and he g ea e alignmen o iscal policy ac oss membe s a es, oge he wi h ew legal o ins i u ional ba ie s o in es men se ed o educe many o he usual explana ions o low c oss-coun y co ela ion. One emaining plausible explana ion is ha low s ock ma ke co-mo emen s ems om he di e ing indus ial composi ion o he indexes. The e o e, a p io i, one migh expec ha wi hin his egion indus ial e ec s may play a mo e impo an ole in po olio choice in he a e ma h o he Eu o being adop ed. Secondly, we apply panel da a es ima ion 15 echniques ha imp o e he e iciency o ou esul s. Compa ed o he mo e adi ional es ima ion app oach, we a e able o a ach s a is ical as well as economic signi icance o ou esul s. Using da a on he Eu o zone ma ke s om 1995-2002, ou indings sugges ha in he pu ely pos -Eu o sample indus y e ec s ou weigh coun y e ec s and hence indus ial di e si ica ion is mo e likely o con e g ea e po olio pe o mance on he in es o . On a e age, co ela ions be ween na ional s ock ma ke s in his a ea ha e dec eased bu by less han c oss-indus y co ela ions. I is also no ewo hy ha co ela ions is-à- is he la ge ma ke s ac ually inc eased. Now, indus ial po olios appea o be less co ela ed han coun y po olios. Indus y-speci ic shocks c ea e mo e e u n dispe sion han coun y-speci ic shocks and hence o e g ea e po olio di e si ica ion bene i s. Howe e , u he analysis e eals ha his change in he ela i e impo ance o coun y and indus y e ec s is no exclusi e o he Eu o zone. In ac , i is also o be ound in a sample o non-EMU Eu opean coun ies whe he analysed sepa a ely o in a la ge pan-Eu opean sample. The e o e we conclude ha his e e sal in he ela i e o unes o coun y and indus y di e si ica ion is no due o he in oduc ion o he common cu ency bu is pa o a global phenomenon ha has also been documen ed o o he egions. Consequen ly, po olio manage s would be well ad ised o adop di e si ica ion s a egies based on indus y po olios a he han coun y po olios. A numbe o explana ions o he epo ed inc ease in he impo ance o indus y e ec s a e sugges ed. Fi s ly, global ma ke condi ions since 1999 ha e been u bulen wi h a numbe o inancial c ises and he c ash ollowing Sep embe 11, 2001. 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An analysis o indus y and coun y e ec s in global s ock e u ns: e idence om Asian coun ies and he U.S. The Qua e ly Re iew o Economics and Finance 43, 560-577. 19 Panel A TOTLF NCYSRCYSER NCYCGCYCGDGENIN BASIC ITECH RESOR UTILS TOTAL OE 10 0 2 5 0 5 7 0 1 2 32 BG 18 5 3 1 0 9 8 2 0 1 47 LX 13 0 2 2 0 0 1 0 0 3 21 FN 3 1 7 5 1 9 9 2 0 1 38 FR 26 6 36 20 17 12 13 9 6 0 145 BD 35 3 8 21 18 24 19 1 0 7 136 IR 6 0 6 9 1 1 8 0 6 0 37 IT 35 4 5 2 10 13 14 1 2 0 86 NL 22 5 18 10 8 11 9 2 7 0 92 ES 23 7 6 7 4 7 15 0 2 5 76 PT 6 4 7 3 1 3 6 0 0 0 30 197 35 100 85 60 94 109 17 24 19 740 Panel B UK 122 9 121 32 8 31 41 14 13 9 400 SW 33 2 13 12 6 18 9 2 0 6 101 DK 13 1 8 10 0 3 1 0 0 0 36 SK 11 0 3 4 2 11 9 3 0 0 43 179 12 145 58 16 63 60 19 13 15 580 Table 1: Panel A (B): Numbe o Companies in Balanced Eu o zone (Non-EMU) Panel by Indus ial Sec o and Coun y. Key: OE = Aus ia, BG = Belgium, LX = Luxembou g, FN = Finland, FR = F ance, BD = Ge many, IR = I eland, IT = I aly, NL = Ne he lands, ES = Spain, PT = Po ugal, UK = Uni ed Kingdom, SW = Swi ze land, DK = Denma k, SK = Sweden, TOTLF = Financials, NCYSR = Non-cyclical Se ices, CYSER = Cyclical Se ices, NCYCG = Non-cyclical Consume goods, CYCGD = Cyclical Consume goods, GENIN = Gene al Indus ials, BASIC = Basic Indus ials, ITECH = In o ma ion Technology, RESOR = Resou ces, UTILS = U ili ies. 20 TOTLF NCYSRCYSER NCYCGCYCGDGENIN BASIC ITECH RESOR UTILS TOTAL OE 0.0029 0.0002 0.0004 0.0005 0.0002 0.0007 0.0015 0.0000 0.0008 0.0009 0.0081 BG 0.0177 0.0019 0.0016 0.0031 0.0002 0.0025 0.0037 0.0002 0.0000 0.0066 0.0374 LX 0.0028 0.0000 0.0013 0.0000 0.0000 0.0000 0.0002 0.0000 0.0000 0.0001 0.0045 FN 0.0019 0.0035 0.0010 0.0017 0.0001 0.0019 0.0054 0.0263 0.0007 0.0001 0.0427 FR 0.0394 0.0331 0.0293 0.0409 0.0177 0.0311 0.0185 0.0218 0.0244 0.0013 0.2575 BD 0.0722 0.0295 0.0125 0.0139 0.0259 0.0447 0.0259 0.0167 0.0003 0.0066 0.2482 IR 0.0063 0.0000 0.0014 0.0042 0.0002 0.0000 0.0027 0.0000 0.0002 0.0000 0.0151 IT 0.0520 0.0312 0.0103 0.0016 0.0086 0.0053 0.0023 0.0006 0.0141 0.0093 0.1354 NL 0.0489 0.0126 0.0163 0.0188 0.0023 0.0111 0.0059 0.0050 0.0345 0.0000 0.1553 ES 0.0278 0.0181 0.0042 0.0022 0.0009 0.0017 0.0055 0.0000 0.0057 0.0149 0.0811 PT 0.0052 0.0046 0.0009 0.0001 0.0001 0.0001 0.0016 0.0000 0.0000 0.0021 0.0148 0.2773 0.1346 0.0792 0.0871 0.0562 0.0992 0.0733 0.0706 0.0805 0.0421 1.0000 Table 2: Pe cen age o Value-weigh ed index by Indus y and Coun y. Key: OE = Aus ia, BG = Belgium, LX = Luxembou g, FN = Finland, FR = F ance, BD = Ge many, IR = I eland, IT = I aly, NL = Ne he lands, ES = Spain, PT = Po ugal, TOTLF = Financials, NCYSR = Non-cyclical Se ices, CYSER = Cyclical Se ices, NCYCG = Non-cyclical Consume goods, CYCGD = Cyclical Consume goods, GENIN = Gene al Indus ials, BASIC = Basic Indus ials, ITECH = In o ma ion Technology, RESOR = Resou ces, UTILS = U ili ies. 21 PRE-EURO OE BG FN FR BD IR IT LX NL PT ES OE 1.000 BG 0.738 1.000 FN 0.648 0.666 1.000 FR 0.760 0.828 0.562 1.000 BD 0.807 0.807 0.675 0.797 1.000 IR 0.674 0.642 0.711 0.627 0.734 1.000 IT 0.644 0.768 0.547 0.777 0.638 0.579 1.000 LX 0.628 0.621 0.457 0.564 0.541 0.550 0.604 1.000 NL 0.821 0.819 0.693 0.856 0.878 0.731 0.704 0.558 1.000 PT 0.759 0.625 0.508 0.776 0.628 0.573 0.661 0.465 0.686 1.000 ES 0.705 0.702 0.627 0.757 0.727 0.702 0.725 0.611 0.748 0.686 1.000 POST-EURO OE BG FN FR BD IR IT LX NL PT ES OE 1.000 BG 0.568 1.000 FN 0.021 0.122 1.000 FR 0.336 0.621 0.716 1.000 BD 0.438 0.631 0.611 0.946 1.000 IR 0.361 0.608 0.346 0.645 0.669 1.000 IT 0.267 0.498 0.593 0.862 0.834 0.526 1.000 LX 0.384 0.411 0.317 0.679 0.732 0.534 0.678 1.000 NL 0.497 0.735 0.560 0.905 0.899 0.723 0.832 0.679 1.000 PT 0.079 0.410 0.508 0.728 0.721 0.433 0.719 0.561 0.618 1.000 ES 0.375 0.576 0.499 0.832 0.830 0.669 0.767 0.605 0.797 0.735 1.000 Table 3. Co ela ion Ma ix o Eu o zone coun ies p e- and pos -Eu o. Key: OE = Aus ia, BG = Belgium, LX = Luxembou g, FN = Finland, FR = F ance, BD = Ge many, IR = I eland, IT = I aly, NL = Ne he lands, ES = Spain, PT = Po ugal 22 PRE-EURO TOTLF N CYS R C YSE R N CYCG C YCGD GENIN B ASIC I TECH R ESOR R ESOR TOTLF 1.000 N CYSR 0.784 1.000 CYSER 0.789 0.851 1.000 N CYC G 0.818 0.846 0.875 1.000 CYCGD 0.833 0.859 0.855 0.874 1.000 GENIN 0.896 0.867 0.887 0.917 0.930 1.000 BASIC 0.810 0.795 0.878 0.870 0.914 0.932 1.000 ITECH 0.805 0.756 0.743 0.692 0.802 0.825 0.773 1.000 RESOR 0.591 0.575 0.649 0.632 0.742 0.692 0.700 0.500 1.000 UTILS 0.534 0.663 0.606 0.564 0.580 0.584 0.557 0.423 0.573 POST-EURO TOTLF N CYS R C YSE R N CYCG C YCGD GENIN B ASIC I TECH R ESOR R ESOR TOTLF 1.000 N CYSR 0.517 1.000 CYSER 0.761 0.773 1.000 N CYC G 0.630 0.070 0.301 1.000 CYCGD 0.786 0.459 0.715 0.432 1.000 GENIN 0.850 0.698 0.917 0.389 0.795 1.000 BASIC 0.800 0.429 0.710 0.454 0.834 0.786 1.000 ITECH 0.707 0.832 0.817 0.272 0.614 0.841 0.606 1.000 Table 4. Co ela ion Ma ix o Eu o zone Indus ial Sec o s p e- and pos -Eu o. Key: TOTLF = Financials, NCYSR = Non-cyclical Se ices, CYSER = Cyclical Se ices, NCYCG = Non-cyclical Consume goods, CYCGD = Cyclical Consume goods, GENIN = Gene al Indus ials, BASIC = Basic Indus ials, ITECH = In o ma ion Technology, RESOR = Resou ces, UTILS = U ili ies. 23 1995-1998 UK SW DK SK UK 1 SW 0.639548 1 DK 0.728706 0.657548 1 SK 0.677344 0.690473 0.616662 1 1999-2002 UK SW DK SK UK 1 SW 0.790238 1 DK 0.685414 0.677749 1 SK 0.731875 0.632709 0.708063 1 Table 5. Co ela ion Ma ix o non-EMU coun ies p e- and pos -Eu o. Key: UK = Uni ed Kingdom, SW = Swi ze land, DK = Denma k, SK = Sweden. 24 End S a Jan 95 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Dec 95 0.5720 Dec 96 0.5258 0.5202 Dec 97 0.5263 0.7019 0.6522 Dec 98 1.6243 1.2697 1.0905 1.5573 Dec 99 1.4045 1.4199 1.3717 1.3483 0.9530 Dec 00 0.8722 0.8773 0.7136 0.6711 0.6612 1.7161 Dec 01 0.6223 0.3946 0.4395 0.4170 0.6440 2.4733 1.2010 Dec 02 0.9368 0.6274 0.8083 1.0230 1.1898 1.8569 1.2757 1.0803 Table 11: Ra io o indus y o coun y e ec s based on balanced panel o 1320 companies om Eu ope. 31 32 End S a Jan 95 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Dec 95 0.9634 Dec 96 0.8009 0.6040 Dec 97 0.5914 0.7677 0.6771 Dec 98 1.5275 1.3004 0.9431 1.3616 Dec 99 1.8263 1.3265 1.1920 1.3552 0.9742 Dec 00 0.9459 0.6075 0.4563 0.5112 0.5422 1.9693 Dec 01 0.7637 0.3163 0.2858 0.4332 0.6872 1.9958 0.7769 Dec 02 0.7212 0.3911 0.5626 0.7751 1.0943 1.7869 1.0350 0.9891 Table 12: Ra io o indus y o coun y e ec s based on balanced panel o 543 companies om EMU excluding inancials.