Email this article 
Hide
Show all
From optimism to pessimism: The stability of the Euro FX market in the short and long run
Abstract
Abstract. We review the EU’s actions over the euro’s lifetime; since its introduction thru to the populist uprising of the late 2010s. The euro was introduced on a wave of optimism throughout the EU, although based on a compromised monetary agreement. Essentially, underlining the crisis and movement from optimism to pessimism in the EU integration road. Thus, it is hard to analyse the euro without reviewing the theories influencing this road. Furthermore, we analyse the long and short-run market stability of the euro FX market using the variance bound model of (Fakhry & Richter, 2018). However, it is difficult to explain the market analysis without referencing behavioural finance. Thus we use key elements of behavioural finance, such as the opposite scale behaviours of greed and fear, to fully explain the timeline analysis of the euro FX market stability in both the long and short runs. At first glance, the result was unexpected due to the critical factor that the market was significantly volatile in the long run; despite conventional wisdom dictating that in the long-run, the financial markets are generally stable. One possible explanation is that the market participants are fearful of the long-run future of the Euro.
Keywords. Behavioural Finance, EU Integration, Euro, Euro Crises, Long/Short Run, Market Stability.
JEL. C58, D81, G01, G02, H77.Keywords
Full Text:
Zotero
MendeleyReferences
Alchian, A.A. (1950). Uncertainty, evolution, and economic theory. The Journal of Political Economy, 58(3), 211–221. doi. 10.1086/256940
Alogoskoufis, G., & Portes, R. (1997). The Euro, the Dollar, and the international monetary system. In: P.R. Masson, T.H. Krueger & B.G. Turtelboom, eds. EMU and the International Monetary System, (pp.58-78), Washington DC, USA: International Monetary Fund.
Baele, L., Ferrando, A., Hördahl, P., Krylova, E., & Monnet, C. (2004). Measuring financial integration in the Euro area. ECB Occasional Paper. Frankfurt, Germany. [Retrieved from].
Banducci, S.A., Karp, J.A., & Loedel, P.H. (2009). Economic interests and public support for the euro. Journal of European Public Policy, 16(4), 564–581. doi. 10.1080/13501760902872643
Barberis, N. (2013). Psychology and the financial crisis of 2007–2008. In: M. Haliassos, (ed.), Financial Innovation: Too Much or Too Little, (pp.15-28), Cambridge, Massachusetts: The MIT Press. [Retrieved from].
Barberis, N., & Thaler, R.H. (2003). A survey of behavioral finance. In: G.M. Constantinides, M. Harris & R.M. Stulz, (eds.), Handbook of the Economics of Finance, (1053-1128), 1st ed. Amsterdam: Elsevier B.V.
Bekaert, G., Harvey, C.R., Lundblad, C.T., & Siegel, S. (2013). The European Union, the Euro, and equity market integration. Journal of Financial Economics, 109(3), 583–603. doi. 10.1016/j.jfineco.2013.03.008
Bergsten, C.F. (1997). The impact of the Euro on exchange rates and international policy cooperation. In: P.R. Masson, T.H. Krueger & B.G. Turtelboom, (eds.), EMU and the International Monetary System, (pp.17-48), Washington DC, USA: International Monetary Fund.
Brunnermeier, M.K. (2009). Deciphering the liquidity and credit crunch 2007–2008. Journal of Economic Perspectives, 23(1), 77–100. doi. 10.1257/jep.23.1.77
Calomiris, C.W. (1999). The impending collapse of the European monetary union. Cato Journal, 18(3), 445-452.
Cappiello, L., Hördahl, P., Kadareja, A., & Manganelli, S. (2006). The impact of the Euro on financial markets. ECB Working Paper. Frankfurt, Germany. [Retrieved from].
Cohen, B.J. (2003). Global currency rivalry: Can the Euro ever challenge the Dollar? Journal of Common Market Studies, 41(4), 575–595. doi. 10.1111/1468-5965.00436
Dabrowski, M. (2010). The global financial crisis: Lessons for European integration. Economic Systems, 34(1), 38–54. doi. 10.1016/j.ecosys.2010.01.002
Danthine, J.-P., Giavazzi, F., & Von Thadden, E.-L. (2000). European financial markets after EMU: A first assessment. NBER Working Paper. No.8044. doi. 10.3386/w8044
De Bondt, W. (2000). The psychology of underreaction and overreaction in world equity markets. In: D.B. Keim & W.T. Ziemba, (eds.), Security Market Imperfections in World Wide Equity Markets, (pp.65-89), Cambridge: Cambridge University Press. [Retrieved from].
Ehrmann, M., & Fratzscher, M. (2002). Interdependence between the Euro Area and the US: what Role for EMU? ECB Working Paper, No.376184. [Retrieved from].
Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. The Quarterly Journal of Economics, 75(4), 643. doi. 10.2307/1884324
Engle, R.F., & Lee, G.G.J. (1999). A long-run and short-run component model of stock return volatility. In: R.F. Engle & H. White, (eds.) Cointegration, Causality and Forecasting—A Festschrift in Honour of Clive W.J. Granger. (pp.475-497), Oxford, UK: Oxford University Press.
Engle, R.F., Lilien, D.M., & Robins, R.P. (1987). Estimating time varying risk premia in the term structure: The arch-m model. Econometrica, 55(2), 391. doi. 10.2307/1913242
Engle, R.F., & Patton, A.J. (2001). What good is a volatility model? Quantitative Finance, 1(2), 237–245. doi. 10.1088/1469-7688/1/2/305
Fakhry, B. (2019a). Did Brexit change the behaviour of the UK’s financial markets? Journal of Economic and Political Economy, 6(2), 98-121.
Fakhry, B. (2019b). Happy 20th birthday Euro: An integrated analysis of the stability status in the Eurozone’s equity markets. Journal of Economics and Political Economy, 6(3), 226-254.
Fakhry, B., & Richter, C. (2018). Does the federal constitutional court ruling mean the German financial market is efficient? European Journal of Business Science and Technology, 4(2), 111–125. doi. 10.11118/ejobsat.v4i2.120
Feldstein, M. (1997). EMU and international conflict. Foreign Affairs, 76(6), 60–73. doi. 10.2307/20048276
Fligstein, N., Polyakova, A., & Sandholtz, W. (2012). European integration, nationalism and European identity. Journal of Common Market Studies, 50(SUPPL.1), 106-122. doi. 10.1111/j.1468-5965.2011.02230.x
Fratzscher, M. (2002). Financial market integration in Europe: On the effects of EMU on stock markets. International Journal of Finance and Economics, 7(3), 165–193. doi. 10.1002/ijfe.187
Friedman, M. (1953). The methodology of positive economics. In: Essays in Positive Economics. (pp.3-43), Chicago, Illinois, USA: University of Chicago Press.
Galati, G., & Tsatsaronis, K. (2003). The impact of the Euro on Europe’s financial markets. Financial Markets, Institutions and Instruments, 12(3), 165–222. doi. 10.1111/1468-0416.00064
Gali, J., & Perotti, R. (2003). Fiscal policy and monetary integration in Europe. Economic Policy, 18(37), 533–572. doi. 10.1111/1468-0327.00115_1
Genschel, P., & Jachtenfuchs, M. (2018). From market integration to core state powers: The Eurozone crisis, the refugee crisis and integration theory. Journal of Common Market Studies, 56(1), 178-196. doi. 10.1111/jcms.12654
Gros, D., & Thygesen, N. (1998). European Monetary Integration: From the European Monetary System to European Monetary Union. 2nd ed. London, UK: Financial Times/ Prentice Hall.
Guiso, L., Herrera, H., Morelli, M., & Sonno, T. (2019). Global crises and populism: the role of Eurozone institutions. Economic Policy, 34(97), 95–139. doi. 10.1093/epolic/eiy018
Haas, E.B. (1958). The Uniting of Europe: Political, Social and Economic Forces. 1st ed. Stanford, California, USA: Stanford University Press.
Heath, C. & Tversky, A. (1991). Preference and belief: Ambiguity and competence in choice under uncertainty. Journal of Risk and Uncertainty, 4(1), 5-28. doi. 10.1007/BF00057884
Hodgson, G. (2013). Banking, Finance and Income Inequality. Positive Money, [Retrieved from].
Hoffmann, S. (1966). Obstinate or obsolete ? The fate of the nation-state and the case of Western Europe. Daedalus, 95(3), 862–915.
Hooghe, L., & Marks, G. (2019). Grand theories of European integration in the twenty-first century. Journal of European Public Policy, 26(8), 1113–1133. doi. 10.1080/13501763.2019.1569711
Jones, E., Kelemen, R.D., & Meunier, S. (2016). Failing forward? The Euro crisis and the incomplete nature of European integration. Comparative Political Studies, 49(7), 1010–1034. doi. 10.1177/0010414015617966
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292. doi. 10.1142/9789814417358_0006
Lopes, L.L. (1987). Between hope and fear: The psychology of risk. Advances in Experimental Social Psychology, 20, 255–295. doi. 10.1016/S0065-2601(08)60416-5
Luo, C.-M. (2017). The rise of populist right-wing parties in the 2014 European parliament: Election and implications for European integration. European Review, 25(3), 406–422. doi. 10.1017/S1062798717000126
Masood, O. (2009). Balance sheet exposures leading towards the credit crunch in global investment banks. The Journal of Credit Risk, 5(2), 57–76.
McCauley, R.N. (1997). The Euro and the Dollar. BIS Working Paper. Basle, Switzerland. [Retrieved from].
Moravcsik, A., & Schimmelfennig, F. (2012). Liberal intergovernmentalism. In: A. Wiener & T. Diez, (eds.) European Integration Theory, (pp.67-87), Second. Oxford, UK: Oxford University Press.
Mudde, C. (2016). Europe’s Populist Surge. Foreign Affairs, 95(6), 25–30.
Mundell, R. (2000). The Euro and the stability of the international monetary system. In: R. Mundell & A. Clesse, eds. The Euro as a Stabiliser in the International Economic System. (pp.57-84), USA: Springer. doi. 10.1007/978-1-4615-4457-9_5
Pastor, L., & Stambaugh, R.F. (2012). Are stocks really less volatile in the long run? The Journal of Finance, 67(2), 431–478. doi. 10.1111/j.1540-6261.2012.01722.x
Polyakova, A., & Fligstein, N. (2016). Is European integration causing Europe to become more nationalist? Evidence from the 2007–9 financial crisis. Journal of European Public Policy, 23(1), 60–83. doi. 10.1080/13501763.2015.1080286
Rosamond, B. (2005). The uniting of Europe and the foundation of EU studies: Revisiting the neofunctionalism of Ernst B. Haas. Journal of European Public Policy, 12(2), 237–254. doi. 10.1080/13501760500043928
Schimmelfennig, F. (2017). Theorising crisis in European integration. In: D. Dinan, N. Nugent & W.E. Paterson, (eds.), The European Union in Crisis. (pp.316–336), Basingstoke, UK: Palgrave Macmillan.
Schimmelfennig, F. (2018). Brexit: Differentiated disintegration in the European Union. Journal of European Public Policy, 25(8), 1154–1173. doi. 10.1080/13501763.2018.1467954
Schmitter, P.C. (2005). Ernst B. Haas and the legacy of neofunctionalism. Journal of European Public Policy, 12(2), 255–272. 10.1080/13501760500043951
Shefrin, H., & Statman, M. (2000). Behavioral portfolio theory. The Journal of Financial and Quantitative Analysis, 35(2), 127-151. doi. 10.2307/2676187
Shiller, R.J. (1979). The volatility of long-term interest rates and expectations models of the term structure. Journal of Political Economy, 87(6), 1190-1219. doi. 10.1086/260832
Shiller, R.J. (1981). Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review, 71(3), 421-436.
Szyszka, A. (2010). Behavioral anatomy of the financial crisis. Journal of CENTRUM Cathedra: The Business and Economics Research Journal, 3(2), 121-135. doi. 10.7835/jcc-berj-2010-0042
Szyszka, A. (2013). Economic and behavioural aspects of the Euro crisis. Argumenta Oeconomica, 2(31), 49–74.
Trichet, J. (2001). The Euro after two years. Journal of Common Market Studies, 39(1), 1–13. doi. 10.1111/1468-5965.00273
Tsarouhas, D. (2019). The EU in crises : Brexit, populism and the future of the union. In: P. Diamond, (ed.), The Crisis of Globalisation : Democracy, Capitalism and Inequality in the Twenty-First Century. (pp.127-143), London, UK: I.B.Tauris.
Tsoukalis, L. (2011). The shattering of illusions - and what next?. Journal of Common Market Studies, 49(SUPPL.1), 19–44. doi. 10.1111/j.1468-5965.2011.02185.x
Wyplosz, C. (1999). An international role for the Euro? In: J. Dermine & P. Hillion, (eds.), European Capital Markets with a Single Currency. (pp.76-104), Oxford, UK: Oxford University Press.
DOI: http://dx.doi.org/10.1453/jepe.v7i4.2149
Refbacks
- There are currently no refbacks.
.......................................................................................................................................................................................................................................................................................................................................
Journal of Economics and Political Economy - J. Econ. Pol. Econ. - JEPE - www.kspjournals.org
ISSN: 2148-8347
Editor: [email protected] Secretarial: [email protected] Istanbul - Turkey.
Copyright © KSP Library
