Time-Varying Dependence in European Equity Markets: A Contagion and Investor Sentiment Driven Analysis

38 Pages Posted: 19 May 2020

See all articles by Mihai Niţoi

Mihai Niţoi

Romanian Academy - Institute for World Economy

Miruna Pochea

Babes-Bolyai University - Faculty of Economics and Business Administration

Date Written: June 5, 2019

Abstract

In the light of the global financial crisis and sovereign debt crisis, this paper investigates the dependence patterns in 24 European equity markets from January 5, 2004 to July 1, 2016. We further examine whether these stressful events trigger contagion. Given that investors tend to behave irrationally in turmoil periods, we add to the literature by studying the effect of investor sentiment on markets correlations. Our results reveal heterogeneity in the time-varying dependence and across markets. Contagion is confirmed in turbulent times, a spillover effect from periphery euro area being detected. We find that similar sentiments increase correlations, especially in crises, suggesting that investors’ perceptions are an important channel of moving markets in the same direction. Furthermore, negative sentiments, such as fear or pessimism, amplify the linkages between markets. Our results offer useful insights to policy makers for reacting timely to financial shocks and for designing a more integrated market.

Keywords: equity market correlations, contagion, crisis, investor sentiment, Generalized Autoregressive Score dynamic copula model

JEL Classification: G01, G11, G15, G41

Suggested Citation

Niţoi, Mihai and Pochea, Miruna, Time-Varying Dependence in European Equity Markets: A Contagion and Investor Sentiment Driven Analysis (June 5, 2019). Economic Modelling, Vol. 86, 2020, Available at SSRN: https://ssrn.com/abstract=3582611 or http://dx.doi.org/10.2139/ssrn.3582611

Mihai Niţoi (Contact Author)

Romanian Academy - Institute for World Economy ( email )

Calea 13 Septembrie nr. 13
Sector 6
Bucharest, 050711
Romania

Miruna Pochea

Babes-Bolyai University - Faculty of Economics and Business Administration ( email )

Str Teodor Mihali, Nr.58-60
Cluj-Napoca, RO- 400591
Romania

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