Connections between the European stock markets
Connections between the European stock markets

Summary/Abstract: This paper analyzes the linkages between the European stock markets. We studied 22 emerging and developed stock markets from 2001 until 2012. In order to analyze the existing connections several multivariate GARCH model were employed, namely the CCC, DCC and BEKK models. We investigate interdependence, integration, contagion and spillover effects as possible linkages between markets. Our results suggests that the developed markets are integrated, with no contagion effect in the correlation structure, only spillover effects in the variance and covariance equations. Regarding the emerging markets, they are characterized by a medium degree of dependence, but with detectable contagion effects. A few markets, from Latvia, Lithuania and Bulgaria show low to no dependence to other European stock markets in periods of financial tranquillity. In these three markets contagion and spillover effects are both distinguishable. In fact, in all the markets we find contagion and spillover effects during the Sub-prime Financial Crisis, which suggest that even if they are not integrated or bound by strong dependence, the direct linkages still transport the shocks. The results do not suggest that the markets are headed towards integrations, instead after the shock, they return to their average level of dependence.

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