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Date of Award

Spring 2012

Degree Name

Bachelor of Science

Major

Economics & Mathematics

First Advisor

Professor Miguel Ramirez

Abstract

The economic crisis experienced by EMU countries as a result of the global recession emanating from the U.S. in 2008 effectively ended the convergence process towards a German model. This thesis argues that initially euro-membership for periphery countries such as Greece and Ireland generated ready access to credit at relatively low cost. After the accession to the Union, investors were engaged in a massive lending spree which led to a housing boom in the aforementioned countries. Furthermore, the negative spillover effects generated from policy failures and unregulated debt burdens has exacerbated the crisis, particularly in Greece. In this thesis, we use a GARCH model to explain the volatility of the Athens’ Stock Exchange General Index. After deriving measures of liquidity risk, country-specific risk factors, international risk aversion, and real exchange rate risk, we examine the implications of risk factors on ten-year government bond pricing and momentum trading for several countries over the pre-crisis and crisis periods. This study assesses the impact of ECB policies on the euro area and examines the economic effects of a likely Greek default, along with a general loss of credible commitment to the European Monetary Union. On the basis of the EGARCH estimates for the Athens stock market, this study suggest appropriate policy lessons to pave the way for Greece to end years of recession.

Comments

Senior thesis completed at Trinity College for the degree of Bachelor of Science in Economics and Mathematics.

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