Financial Contagion Vulnerability: A Comparison of European Capital Markets

Abstract

This paper investigates contagion to European capital markets associated with seven big financial shocks between 1997 and 2002. We apply a technique using heteroscedasticity adjusted correlation coefficients to discriminate between contagion and interdependence. The analysis focuses on a comparison between developed Western European markets and emerging capital markets in Central and Eastern Europe. We find little evidence of significant increases in cross-market linkages after the crises under investigation. The Central and Eastern European capital markets are not more vulnerable to contagion than Western European markets.

Keywords: Financial Contagion, financial crises, Western, Central and Eastern European stock markets, adjusted correlation coefficient

JEL Classification: G15, C12