A Dynamic Correlation Analysis of Financial Contagion: Evidence from the Eurozone Stock Markets

Trabelsi, Mohamed Ali and Hmida, Salma (2018): A Dynamic Correlation Analysis of Financial Contagion: Evidence from the Eurozone Stock Markets. Published in: Entrepreneurial Business and Economics Review , Vol. 6, No. 3 (September 2018): pp. 129-141.

Abstract

Objective: In this article, we try to determine whether there are contagion effects across the Greek stock market and the Belgian, French, Portuguese, Irish, Italian and Spanish stock markets during both crises periods.

Research Design & Methods: To reach our aim, we used a bivariate Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroscedasticity (DCC-GARCH) model to measure the extent of dynamic correlations between stock returns of our sample.

Findings: Our results point to the presence of a contagion effect between all market pairs during the subprime crisis and between the Greek and Portuguese stock markets during the European sovereign debt crisis. Implications & Recommendations: The obtained results are useful for investors, in particular for their portfolio diversification strategies. They are also useful for the monetary and financial authorities in their efforts to absorb shocks resulting from crises.

Contribution & Value Added: The originality of this work lies in studying contagion effect across the Eurozone stock markets through the bivariate DCC-GARCH model which is an original dynamic estimation of conditional correlations in Multivariate GARCH models. The measures of contagion effects following the valuation of countries induced by the massive negative sovereign rating signals during the crisis period would also be interesting to study. The methods might also be applicable to this kind of contagion type and for contagions effects across European stock market returns.

• Item Type: MPRA Paper
• Language: English
• Keywords: Eurozone; Financial contagion; European debt crisis; Sovereign risk; Dynamic conditional correlations; interdependence
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

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