Extreme Returns in the European Financial Crisis

European Financial Management, Vol. 23, Issue 4, pp. 728-760, 2017

43 Pages Posted: 13 Nov 2016 Last revised: 28 Aug 2019

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2016


We examine the transmission of financial shocks among three groups of countries: the Euro-periphery countries (Portugal, Ireland, Italy, Greece, Spain), the Euro-core countries (Germany, France, the Netherlands, Finland, Belgium), and the major European Union - but not Euro - countries (Sweden, UK, Poland, Czech Republic, Denmark). Using extreme returns on daily stock market data from January 2004 until March 2013, we find that transmission effects are present for the tails of the returns distributions for the Pre-crisis, the US-crisis and the Euro-crisis periods from the Euro-periphery group to the Non-euro and the Euro-core groups. Within group effects are stronger in the crisis periods. Even before the two crises there was a significant shock transmission channel from the Euro-periphery to the Euro-core and the Non-euro. During the crises the shocks transmitted were more substantial (in some cases, extreme bottom returns doubled). As extreme returns have become much more severe during the financial crisis periods, the expected losses on extreme return days have increased significantly. Given the fact that stock market capitalizations in these country groups are in trillions of Euros, a 1% or 2% increase in extreme bottom returns (in crisis periods) can lead to aggregate losses of tens of billions Euros in one single trading day.

Keywords: Financial Crisis, Financial Contagion, Spillover, Euro-crisis, Stock Markets

JEL Classification: G01, G15

Suggested Citation

Chouliaras, Andreas and Grammatikos, Theoharry, Extreme Returns in the European Financial Crisis (November 13, 2016). European Financial Management, Vol. 23, Issue 4, pp. 728-760, 2017. Available at SSRN: https://ssrn.com/abstract=2502884 or http://dx.doi.org/10.2139/ssrn.2502884

Theoharry Grammatikos

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246

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