Stock market interdependencies - Evidence from the Eurozone´s southern periphery before and after the outbreak of the European debt crisis

Abstract

Recent events in the Eurozone´s southern periphery have directed much interest to the region but only a limited number of studies have targeted the market interdependencies among these counties. This thesis examines the interdependencies among the stock markets in the Eurozone´s southern periphery, before and after the outbreak of the European debt crisis. By applying the Johansen test of cointegration and the DCC-MGARCH model, both the long-run and short-run interdependencies are examined. The data employed consist of daily stock market index return series from Greece, Italy, Portugal and Spain, covering the period January 1, 2001 to May 10, 2013. This period is further decomposed into two subsamples to enable an analysis of how the European debt crisis has impacted the interdependencies in the region: the pre-crisis period ranges from January 1, 2001 to October 15, 2009 and the post-crisis period from October 16, 2009 to May 10, 2013. The result shows evidence of stock market interdependencies in the Eurozone´s southern periphery, particularly in the form of short-run volatility correlation. The result also indicates that the outbreak of the European debt crisis has affected the volatility correlation in the region. The main finding is that the volatility correlation has increased since the outbreak of the European debt crisis between all pairwise comparisons except for these involving the Greek market. The fact that interdependencies exist among all markets in the region is imperative for investors and policy makers and highlights the importance of sound portfolio management and regulatory policies.