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European Stock Markets Correlations In A Markov Switching Framework

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  • Iulia LUPU

    (Victor Slăvescu” Centre for Financial and Monetary Research, Bucharest)

Abstract

The growing correlations in global markets during negative shocks generated theoretical and policy debate for the concept of contagion. Acknowledging the different forms of contagion, this paper investigates this phenomenon throughout the last financial crisis at the global scale. In the line with the related studies, we use the narrow definition of contagion - a considerable increase in stock market comovement as a response to a shock affecting one country (or a group of countries). We applied the DCC GARCH setting to compute the daily correlations for a time lapse beginning in 2000 and closing in 2015 to verify contagion in 49 stock indices. After that we calibrate a Markov switching analysis with two states on the series of correlations for each country with all the set of other countries. We identified the moments when regime switches happen in the same time and we found different patterns in the dynamics of these simultaneous changes.

Suggested Citation

  • Iulia LUPU, 2015. "European Stock Markets Correlations In A Markov Switching Framework," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 103-119, September.
    • Handle: RePEc:rjr:romjef:v::y:2015:i:3:p:103-119
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    More about this item

    Keywords

    contagion; European stock markets; dynamic conditional correlations; GARCH; Markov switching models;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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