Realized portfolio selection in the euro area

A new approach to mean-variance efficient portfolio selection is introduced. The method is based on realized regression theory and the regression based portfolio selection approach of Britten-Jones (1999), yielding a conditional version of the Britten-Jones (1999) method. Some of the noticeable results of the paper are as follows. Firstly, the monetary union may have had a much less important impact on the integration of euro area equity markets than what in general believed in the literature. Secondly, even if comovement is strong, stock market integration in the euro area would not seem to have fully occurred yet. Hence, diversification among European or euro area stock markets may still be feasible and desirable. The proposed portfolio selection approach, differently from other standard approaches, actually yields a balanced and stable allocation of wealth, free from the problem of corner solutions, suggesting that current allocations should slightly favour Greece, Finland and Ireland over the other member countries.