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

Mohamed Ali Trabelsi and Salma Hmida

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Eurozone; Financial contagion; European debt crisis; Sovereign risk; Dynamic conditional correlations; interdependence (search for similar items in EconPapers)
JEL-codes: C22 F34 G01 G15 H63 (search for similar items in EconPapers)
Date: 2018, Revised 0218
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Published in Entrepreneurial Business and Economics Review 3.6(2018): pp. 129-141

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Related works:
Working Paper: A Dynamic Correlation Analysis of Financial Contagion: Evidence from the Eurozone Stock Markets (2017)
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