A dynamic conditional correlation analysis of European stock markets from the perspective of the Greek sovereign debt crisis

Abstract

By using the asymmetric dynamic conditional correlation model developed by Cappiello et al. (2006), we examine how the time-varying correlations between Greece and other six European countries (Germany, France, UK, Ireland, Italy, and Spain) evolved from January 2007 to March 2011. The main contribution of the study is investigating whether the financial turmoil that originated from one nation's government debt market can exert contagion effects on equity markets in other countries of the region. We show that the dynamic correlations exhibited swings over time with several peaks, particularly in September 2008 and May 2010 and, interestingly, that the correlations indicated significant declines (rather than increases) during the sovereign debt crisis. The results imply that diversification opportunities between Greece and the other six European nations may have been created since the debt crisis intensified.

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