Financial contagion across major stock markets: A study during crisis episodes

The recent financial crises have motivated the researchers to study the cross-market linkage, and how shocks are transmitted across countries. Several scholars have studied financial contagion and its different impacts on markets and international portfolios using static models. This paper employs a regular vine copula approach to model the dependence dynamics between major American and European stock markets by distinguishing the effects during crisis periods and tranquility periods. Empirical results show a significant change in the connectedness and shock transmissions during both periods, indicating strong evidence of financial contagion with the Eurozone at its origin. Moreover, the regular vine copula surpasses the multivariate t copula. Hence, the shock transmission path is as important as the dependence itself.