How would Eurozone equities respond to a bond sell-off?

Abstract

Economic OutlookVolume 39, Issue 3 p. 18-24 Economic Outlook How would Eurozone equities respond to a bond sell-off?† First published: 12 August 2015 https://doi.org/10.1111/1468-0319.12165 † By Bronka Rzepkowski, PhD, Senior Economist, brzepkowski@oxfordeconomics.com AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract We have developed a new model to measure the impact on Eurozone equities of a global bond sell-off as the Fed starts to tighten its monetary stance later this year. We show that the most affected countries would be Greece, Finland and Portugal: the cumulated equity loss compared to the baseline ranges from between 35% to more than 50% in the case of Greece at the end of 2017. Under this scenario, Belgium, Ireland and Austria are less impacted by the global re-pricing of risk. In light of global risk being skewed to the downside (China, Greece, risk-off), it is essential to have a framework that is able to generate consistent responses of Eurozone stock indices to global macro shocks in stress test scenarios. The approach assesses first the co-movements of Eurozone stock indices and aims to explain them with macro variables such as the US S&P index, the oil price, the euro/dollar exchange rate and short- and long-term interest rate differentials between the Eurozone and the US. We find a high degree of co-movement in Eurozone equity returns. This matters from an asset management perspective, as it reveals limited potential for diversification benefits of an equity portfolio invested across Eurozone countries. Volume39, Issue3July 2015Pages 18-24 RelatedInformation