Does the introduction of the Euro have impacted the volatility of European financial markets?

Abstract

The Euro was one of the most politically and economically ambitious projects of recent decades. Nevertheless, nowadays some people are questioning its viability. This is why in this study, we aim to assess an indirect effect of the Euro. This effect is the impact of the introduction of single currency on the volatility of European markets. To this end, first we set the plot by developing the historical context that led to the introduction of the Euro. Indeed, the process of European exchange rates convergence began decades before the 1990s. This is crucial for understanding the transition process to a new currency. After studying the impact of this single currency on different aspects of finance during the empirical review, we define the concept of volatility which is central to our analysis. By including a new variable in traditional E-GARCH models, we avoid an omitted variable error. We fear that part of the Euro's effect on volatility of stock markets was attributed to investor sentiment. This new model has estimated interesting results exhibiting that the Euro had only a marginal or even no impact on the volatility of some markets studied. Even if a particular test evaluating the robustness of our models proves that they can be misidentified during crises, we will be optimistic about our results. Indeed, it is relatively complicated to extract even a marginal effect of the Euro on volatility when market fluctuations are significant. From this, we conclude that the results of our models are promising but must be qualified due to the difficulty of having the ceteris paribus effect of the European currency on volatility of stock markets.