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

The contagion generated by the US subprime crisis and the European sovereign debt crisis that hit the Eurozone stock markets is still a highly debated subject. In this paper, 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. To this end, we used a bivariate DCC-GARCH model to measure the extent of dynamic correlations between stock returns of our sample. 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. On the other hand, our results indicate that credit ratings revisions have a relatively limited effect on the dynamic correlations of the Eurozone stock markets.