Financial Contagion in European Equity Markets: Evidence from the US Subprime and the Eurozone Crises

Authors

  •   Ashish Kumar Assistant Professor, University School of Management Studies, Block D, Guru Govind Singh Indraprastha University, Sector 16 C, Dwarka, New Delhi - 110 078
  •   Swati Khanna Assistant Professor (Corresponding Author), IILM Institute of Higher Education, Lodhi Road, Lodhi Colony, New Delhi - 110 003
  •   Sanjay Dhingra Professor, University School of Management Studies, Block D, Guru Govind Singh Indraprastha University, Sector 16 C, Dwarka, New Delhi - 110 078
  •   Neena Sinha Professor, University School of Management Studies, Block D, Guru Govind Singh Indraprastha University, Sector 16 C, Dwarka, New Delhi - 110 078

DOI:

https://doi.org/10.17010/ijf/2022/v16i8/171372

Keywords:

Financial contagion

, financial crisis, dynamic conditional correlation, stock markets, GARCH

JEL Classification Codes

,

C58

, C49, G1, G15, N25

Paper Submission Date

, August 20, 2021, Paper sent back for Revision, February 15, 2022, Paper Acceptance Date, March 15, Paper Published Online, August 16, 2022

Abstract

The study explored the financial contagion between the five European stock markets (Germany, Belgium, France, Netherlands, and Spain) and the impact of the US subprime crisis and Eurozone crisis on it by employing multivariate DCC-GARCH methodology. The dynamic conditional correlation coefficient between Germany and other European markets was statistically significant for the period under review. The rise in the value of the conditional correlation coefficient was more evident during the US subprime crisis period, which signified the impact of this crisis on the financial interdependence of the European stock markets. But not much influence of the Eurozone crisis was observed on the dispersion of returns for all the markets, which was an important finding. The mechanism of rolling regression also corroborated these results. The study also validated the presence of financial contagion between the stock markets (except the Netherlands) during the US subprime crisis period. In contrast, the effect of the Eurozone crisis on financial contagion was significant only for Spain and Belgium. Further, the strength of financial contagion was highest for the stock market of Spain, followed by Belgium, and the least for the Netherlands. The timid reaction of the stock market of the Netherlands reflected that it could be a good choice for portfolio diversification during periods of crisis for investors. Further, governments and other regulators can learn from these findings and formulate appropriate policies to absorb the financial shocks coming from foreign markets, especially during the crisis period.

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Published

2022-08-01

How to Cite

Kumar, A., Khanna, S., Dhingra, S., & Sinha, N. (2022). Financial Contagion in European Equity Markets: Evidence from the US Subprime and the Eurozone Crises. Indian Journal of Finance, 16(8), 8–28. https://doi.org/10.17010/ijf/2022/v16i8/171372

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Articles

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