Finance

We investigate how the elimination of the intra-european risk may affect international financial marks. To this end, we identify and measure the EMU and non-EMU components of aggregate currency risk using a conditional version of the International CAPM. We document significant exposures to and premiums for both sources of currency risk. The premium for EMU risk is positive and associated primarily with exposure to the French, Italian, and Spanish currencies. Not surprisingly, exposures to Austrian, Belgian, and Dutch currency risk and associated premiums are negligible. The premium for non-EMU risk is consistently negative and accounts for most of the aggregate currency premium. In the nineties, exposures to the EMU risk have significantly declined while exposures and premiums associated with non-EMU risk have significantly increased. This suggests that the adoption of the euro is unlikely to have large impact on aggregate currency risk-premiums.