The Introduction of the Euro and its Effects on Investment Decisions

In this paper we examine changes on investment decisions induced by the introduction of the Euro. There are two potential sources of portfolio reallocation. First, exchange rate risk diminished within the EMU region. Second, monetary policy has been bundled within one institution. We test for structural breaks in the portfolio holdings of German investors and estimate a market model in order to account for the two described effects. We observe a significant decrease in national and significant increase in intra-EMU as well as US investments. Therefore, the establishment of the EMU led to a decrease of investment home bias