This paper applies the Dynamic Conditional Correlation ( GARCH-DCC ) theoretical account in order to analyze the time-varying conditional correlativities of seven Euroarea and six Non-Euroarea states. We used the day-to-day informations for the period 1996-2012, in order to capture the possible fiscal contagious disease among the USA, GIPSI and the other European stock markets. Analyzing the Eurozone crisis period ( May, 2009-January, 2012 ) , the empirical consequences indicate that among GIPSI states, Spain and Italy appear to be most contagious for Euroarea and Non-Euroarea states, while the impact of Greece is comparatively lower. Therefore, the focal point of Financial Stability Board ( FSB ) must be on resuscitating the macroeconomic every bit good as stock market basicss of these two economic systems instead than over stressing on Greece. Further, the combined effects of GIPSI states on Euroarea and Non-Euroarea examined markets are far stronger than their single effects of any of their standalone effects. From policy shapers ‘ position, strong fiscal contagious disease may raise concerns about the acceptable degree of fiscal integrating in EU. From planetary investors ‘ position, the EU market is expected to supply small range for portfolio variegation. The survey contributes to fiscal contagious disease literature for European stock market and relevant in aftermath of recent Eurozone crisis.
JEL Classification: C22, G14, G15
Keywords: European stock markets, fiscal contagious disease, dynamic conditional correlativities ( DCC-GARCH ) , fiscal crises, Eurozone crisis
In recent old ages, due to frequent ups and downs in stock market motions, the analysis of clip changing stock market correlativities has received extreme attending of academicians, institutional investors, equivocators and bargainers owing to its strong deductions for plus allotment and hazard direction. This is apparent from the recent experiences of fiscal crises of USA ( 2008 ) and Europe ( 2010 ) that raised several inquiries refering the cross-market linkages and at the same clip it made hard for policy shapers and planetary investors to analyse the cross-market correlativities. As the stock markets in the crisis-hit states usually exhibited higher degrees of mutuality, ensuing in rapid transmittal of fiscal dazes across the markets in a short clip. Stock market co-movements are holding significance in placing the low stock market correlativities which is important in doing planetary portfolio variegation scheme. Diversification benefits are by and large weaker when the correlativity between fiscal markets returns are higher and vice-versa ( see e.g, Lessard 1973 ; Solnik 1974 ; Ang and Bekaert 1999 and Longin and Solnik 1995, 2001, Syllignakis and Kouretas 2011 ) . A important addition in stock returns correlativities at the clip of crisis and station crisis event refers to a phenomena called contagious disease which in general term defined as the spread of fiscal dazes from one state to others. In recent old ages, in the aftermath of recent planetary fiscal crisis, fiscal contagious disease has become a fertile research terrain for research workers, policy shapers and market participants.
The planetary extent of recent US subprime ( 2008 ) and subsequent Eurozone fiscal ( 2010 ) crises and their possible damaging effects on five European states popularly labeled as “ GIPSI ” ( Greece, Ireland, Portugal, Spain and Italy ) has raised several inquiries refering the sustainability every bit good as farther enlargement of Euroarea in future. The spread of contagious disease started with Greece due to the likeliness of default on its autonomous debt duty in the late 2009 and all of a sudden transmitted to the full Euroarea and Non-Euroarea states in Europe.
In this survey, we concentrate on Eurozone crisis ( 2010 ) by analyzing the fiscal contagious disease across Euroarea and Non-Euroarea states in Europe by sing GIPSI states as a beginning of contagious disease along with USA as a planetary factor for the part. We besides construct a GIPSI Crisis Index ( henceforth, GCI ) utilizing GIPSI stock market returns in order to reconfirm the grounds of contagious disease on Euroarea and Non-Euroarea states. The survey has strong deductions for policy shapers in guaranting the fiscal stableness and for the investors who are concerned about the hazards involved in their investings.
Eurozone is considered as one of the strongest pecuniary brotherhood in the universe. But due to the recent turbulences in GIPSI states, the economic sentiments of Eurozone ( referred interchangeably as Euroarea ) and Non-Eurozone ( Non-Euroarea ) have been at a historically low degree and has besides been responsible for unprecedented degrees of anxiousness among EU member states, due to the late recovery of troubled GIPSI economic systems in close hereafter. Though, European Central Bank ( ECB ) along with International Monetary Fund ( IMF ) and other G20 states is seeking to deliver these economic systems but due to strong cardinal linkages among Euroarea states, it seems hard to bring around the contagious disease at this phase. Till now, the impacts of all these developments have been really pessimistic every bit far as the motion of stock markets in both parts of EU is concerned.
It is noteworthy that though the crisis in GIPSI states is the consequence of autonomous debt hazard and non wholly originated from stock market but it is inevitable that crisis in one section of the fiscal system that is debt market spills over to the other sections like stock market owing to strong informational linkages. Therefore, the aim of this survey is to analyze the contagious disease effects by analysing dynamic conditional correlativities between the GIPSI and Euroarea and Non-Euroarea stock markets.
Eurozone crisis ( 2010 ) can loosely be divided into two classs. First, due to banking crisis which started with the contagious disease of US subprime and flop of belongings markets of some EU states and ( two ) due to sovereign debt crisis exacerbated by ineluctable asceticism steps, recession, lifting authorities shortages and debt degrees over many old ages that was against the rules laid down in the Maastricht Treaty ( see for example, Blundell-Wignal and Solvik 2011 ) . Consequently, the damaging impacts of these unfavourable macroeconomic scenarios impacting Greece and Ireland economic systems which faced really important inauspicious motions in their output spreads relative to Eurozone benchmark bonds, and this is besides the instance for Portugal, Spain and Italy.
2. An Overview of Euroarea and Non-Euroarea stock markets
After the successful execution of Maastricht pact in 1993, European Union ( EU ) became a stronger entity and subsequently on in late 2000, it merged all its three phases and moved towards brotherhood. In June 1988, the demand for European Monetary Union ( EMU ) was realized after the announcement of Delor Report in 1989. The first phase of EMU was realized with the abolishment of all limitations in the motion of capital. In the 2nd phase, a individual currency system in European Monetary Union ( EMU ) with new exchange rate mechanism was advocated which eventually came into being in January, 1999 when ‘Euro ‘ was introduced as individual currency in EMU country, get downing the 3rd phase of EMU. At present, there are 27 states which come under the European Union out of which 17 have formed EMU popularly called as Euroarea and Eurozone, while remainder pursues independent macroeconomic direction policies. There is no uncertainty that the stock markets falling under common currency country are strongly linked but it is besides a fact that the Non-Euroarea states enjoy the stronger economic ties with Euroarea states, doing them alone in the universe.
In Table 1, we provide an overview of of import features of the examined stock markets in Euroarea and non-Euroarea. The motor behind such analysis is to foreground the comparative significance of major economic systems in Eurozone and Non-Eurozone groups in footings of the size of the economic system and stock market development indexs. GDP ( PPP, changeless 2005 international dollar ) is used to exhibit the portion of GDP of each Euroarea and non-Euroarea states in EU and peculiarly the Euroarea economic systems in Eurozone. The Table 1 shows that the among all examined economic systems of Euroarea, Germany is the largest economic system in EU and Eurozone in footings of its portion in GDP followed by France, Spain, Netherlands and Belgium. While, among examined Non-Eurozone states, UK is the largest economic system in footings of its portion in EU ‘s GDP followed by Sweden, Norway and Czech Republic. The smallest state is Slovak Republic in Eurozone and Hungary is in Non-Eurozone. Based on the per centum portion of entire market capitalisation as shown in Table 2, France is the largest stock exchange in EU every bit good as Eurozone followed by Germany, Spain, Netherlands and Belgium, while, in Non-Eurozone it is the UK followed by Sweden, Denmark and Norway. The smallest stock exchange in Eurozone is Slovak Republic while in Non-Eurozone, it is Hungary. In footings of figure of listed houses, the examined stock markets have well different forms. Table 3 shows that among Eurozone economic systems, Spain enjoys the largest portion followed by France, Germany, Greece and Belgium. While among non-Eurozone states, UK has the largest portion followed by Sweden, Norway and Denmark. The last index used is stock traded as per centum of GDP. It is by and large used to complement the market capitalisation ratio by exhibiting whether market size is matched by trading or non. Table 4 shows that among Eurozone states, Spain followed by Netherlands, Finland, France, Germany and Belgium and lowest is Slovak Republic followed by Ireland and Greece. However, among Non-Eurozone states, the largest traded stock exchange is UK followed by Sweden, Denmark and Norway. UK turns out to be Numero Uno in footings of stocks traded in both the parts. It is surprising to observe that based on the rankings of stock markets are different than the market capitalisation, connoting that the listing norms are different across states and concentration of trading at comparatively larger and developed stock exchanges are well higher than little and illiquid stock exchanges owing to different market microstructure scenes and market clashs such as trading cost and revenue enhancements.
[ Insert Table 1 here ]
[ Insert Table 2 here ]
[ Insert Table 3 here ]
[ Insert Table 4 here ]
3. Brief Literature Review
Research on fiscal contagious disease has historically been limited and after a series of planetary economic crisis, it has become a burgeoning country of research in recent times. A big figure of surveies on fiscal contagious disease are majorly linked to the developed stock markets ( Hamao, Masulis, & A ; Ng 1990 ; Theodossiou & A ; Lee 1993 ; Longin & A ; Solnik 1995 ; Bekaert, 1995 ; Bekaert & A ; Harvey 1995 ; Chen, Firth, & A ; Rui 2002 ; Meric & A ; Meric 1997 ; Goetzmann, Li, & A ; Rouwenhorst 2001 ; Cappiello, Engle, & A ; Sheppard 2006 ; Kim, Moshirian, & A ; Wu 2005, Min and Hwang 2012 ) while some recent surveies have extended this line of research to the linkages between the emerging and developed stock markets ( Yang 2005 ; Chiang, Jeon, & A ; Li 2007 ; Phylaktis & A ; Ravazzolo 2005, K Choe et Al 2012 ; Chiang et Al 2007 ; Kenourgios et Al 2011 ; Marcal et Al 2011 ; Samarakoon 2011 ; Kenourgios and Padhi 2012 ; Suardi 2012 ) . However, even though most of the aforesaid surveies have focused on emerging markets in Asia and Latin America and assorted of planetary markets, grounds on stock market linkages in the European markets focused chiefly on Eurozone and non-Eurozone states remains limited. Gelos and Sahay ( 2000 ) examine the impacts of assorted economic crises on Central and Eastern European fiscal markets. Their survey finds the grounds of important addition in correlativity during Russian Crisis ( 1998 ) by corroborating Magyar stock market as the most contagious market during that period. It was further reconfirmed by Schotman and Zalewska ( 2006 ) who besides conclude that the Magyar stock market was the most vulnerable and the Czech market the least wedged to Asian ( 1997 ) and Russian crises ( 1998 ) . Furthermore, Wang and Moore ( 2008 ) report the grounds of a higher degree of fiscal market correlativity between three emerging European markets and the aggregative Eurozone market by taking into history the Asian and Russian crises and besides sing the post-entry period to the European Union. Scheicher ( 2001 ) in a survey on European markets provide the grounds of limited interactions between emerging and full-blown European markets. Syllignakis and Kouretas ( 2010 ) examine the emerging Central and Eastern European states that are partly integrated with the full-blown USA and German markets. Their survey concludes that all European stock markets are co-integrated with mature markets due to common lasting constituent with the exclusion of Estonian market. They further infer that the recent US subprime crisis has negative bearing on these markets. In another survey, Syllignakis and Kouretas ( 2011 ) utilizing dynamic conditional correlativities examine the procedure of fiscal contagious disease among the German, Russian, US and Central and Eastern European ( CEE ) markets.2They study that there is statistically important addition in conditional correlativities between the US and German stock returns and the CEE stock returns, peculiarly during US fiscal crisis of 2007-09. Samarakoon ( 2011 ) provide the grounds of transmittal of US fiscal crisis dazes to emerging and frontier markets ( including European and non-European market ) , and study that there is mutuality and contagious disease between the US and emerging markets while frontier markets are contagious. While, re-examining the grounds of contagious disease based on changeless correlativity trial during Asiatic crisis ( 1997 ) on big basket of states which besides included the 10 matured markets of Europe, Choe et Al ( 2012 ) utilizing structural dynamic conditional correlativity ( SDCC ) -GARCH theoretical account, study no grounds of contagious disease for examined states. Sojli ( 2007 ) find the mutuality of Russian crisis to the European emerging markets of Slovenia, Estonia and Czech Republic. Based on the bing literature on fiscal contagious disease, it is evident that none of the surveies have examined the stock market correlativities of Euroarea and Non-Euroarea in the visible radiation of recent Eurozone crisis particularly at the clip when Europe is confronting contagious disease owing to its ain jobs. Therefore, in order to look into the contagious disease, it is necessary to analyze the motions of cross-country plus monetary values, peculiarly the stock market motions because it affects the plus monetary values other than the autonomous bond monetary value of the state well. In this survey we concentrate on Eurozone fiscal contagious disease which is an result of inauspicious motions in autonomous outputs and crowned head evaluation intelligence on European capital markets ( see for illustration, Arezki, Candelon, and Sy 2011 ; Missio and Watzka 2011 ; Afonso, Furceri, and Gomes 2011 ; Blundell-Wignall and Slovik 2011 ; Afonso, Furceri, and Gomes 2011 ; Tamakoshi and Hamori 2012 ) . This paper makes a figure of parts to the relevant literature. First, to the best of our cognition this is the first survey that examines the issue of fiscal contagious disease for such a big basket of European states consisting of Eurozone and Non-Eurozone foregrounding peculiarly the period of fiscal convulsion 2009-2012. Second, while old surveies on the topic used a little sub-group of the EMU economic systems, we extend our analysis to a larger group of EMU and Non-EMU states with significant diverseness by sing GIPSI and USA economic systems as regional and planetary factors and beginning of contagious disease. Third, we employ the Dynamic Conditional Correlation ( DCC ) multivariate GARCH theoretical accounts developed by Engle ( 2002 ) to look into the form of short-term mutualities and to analyze possible channels of contagious disease effects between GIPSI including US and Euroarea and Non-Euroarea stock markets. A concluding novel characteristic of the present survey is the thorough analysis of the possible policy deductions that takes into history the alterations in the correlativity patterns across states and clip. The remainder of the paper is organized as follows. Section 4 presents the informations employed and discusses the empirical consequences and Section 5 provides our decisions.
4. Datas and empirical consequences
The informations used in this paper are day-to-day stock-price indices from February 02, 1996, through January 31, 2012, for the equity markets of seven Euroarea and six Non-Euroarea member states. The information set consisted of the stock market indices of the Austria, Belgium, Finland, France, Germany, Netherlands and Slovakia of Euroarea and Czech Republic, Denmark, Hungary, Norway, Sweden and UK of Non-Euroarea. GIPSI and USA are considered as regional and planetary factors for both set of states. All stock-price indices are used in dollar currency footings and are based on day-to-day shutting monetary values for each market.3These stock market indices are transformed into day-to-day rates of returns taking the first difference of the natural log of each stock-price index. The beginning of the information is DataStream International.
Since the aim of present survey is to analyze the impacts of GIPSI stock market returns on Eurozone and Non-Eurozone states, by manner of comparing the DCC correlativities during crisis and stable period. We spilt the sample period as follows: ( 1 ) . Eurozone crisis period, ( May 2009 to January 2012 ) . This is in line with Missio and Watzka ( 2011 ) . ( 2 ) . Stable period ( February 1996 to July 2007 ) . The stable period takes into history before and after the existent clang utilizing all historical information contained in pre and post-crash informations ( see Kenourgios et al 2011 ) . Stable period doesnot take into history the convulsion periods of Asiatic crisis ( 1997 ) , Brazilian crisis ( 1998 ) , Dot com bubble flop ( 2000 ) , Argentine crisis ( 2002 ) and the periods of subprime ( 2007-2009 ) . It may here be noted that since some surveies have already examined the impact of US fiscal crisis on different basket of European states even in the assorted sample ( see for illustration, Syllignakis and Kouretas 2011 ; Samarakoon 2011 ) . Therefore, the present survey is chiefly focused on the on-going crisis in Eurozone and its contagious disease effects on its ain member states.
[ Insert Table 5 here ]
[ Insert Table 6 here ]
We begin the analysis of empirical consequences with full sample statistics ( including both crisis and stable period ) followed by the descriptive statistics of lone crisis period. This is chiefly to analyze the differences in behavior of conventionalized facts of both samples. Table 5 shows the descriptive statistics of full sample. The average returns of all four currencies are about zero per centum ( see Table 5 ) . The highest average day-to-day returns is observed in instance of Finland ( 0.029 ) followed by Germany ( 0.024 ) , Spain ( 0.021 ) and Austria ( 0.017 ) per centum. The market with last stock market returns is observed in Greece ( -0.006 ) . While, during crisis period ( see Table 6 ) , the mean average returns of five states are in negative in Euroarea with the lowest returns reported in Greece ( -0.139 % ) followed by Slovakia ( 0.070 % ) , Portugal ( -0.04 % ) , Italy ( -0.028 ) and Spain ( -0.012 % ) . The highest average returns is in Germany and Ireland ( 0.036 % ) followed by Netherlands ( 0.031 % ) . In instance of Non-Eurozone states ( see Table 5 ) , the stock market with highest average return is Hungary ( 0.043 ) and lowest is UK ( 0.011 ) , whereas, during crisis period the lowest average return is observed in Czech Republic ( 0.014 % ) and highest in Sweden ( 0.64 % ) ( see Table 6 ) . Equally far as volatility is concerned, among Eurozone states, the highest volatility is observed in instance of Greece ( 1.99 ) and lowest in Portugal ( 1.40 ) . While, during crisis period, the highest standard divergence is reported in instance of Greece ( 2.573 % ) followed by Austria ( 2.141 % ) , Spain ( 2.127 % ) and Finland ( 2.059 % ) . For Non-Eurozone states, the most volatile stock market is Hungary ( 2.25 ) and followed by UK ( 1.42 ) and the same is the instance during examined crisis period as good. During both the sample periods, as expected the lopsidedness for each series is negative ( with the exclusion of Belgium, Greece, Spain and Hungary ) and leptokurtic for Eurozone and Non-Eurozone states. During crisis period, the lopsidedness of both Euroarea and Non-Euroarea are besides negative except for Greece, Spain, Belgium and Hungary which can be explained by the series of market recessions over the survey period and has besides substantiated the crisis period. It is non surprising that the Jarque-Bera trial indicates that all stock market returns are non-normal. We besides report the Ljung-box statistic up to ten orders in degrees and squared of returns for both examined samples. The consequences clearly indicate that there is no consecutive correlativity in degrees, except for Austria, Finland, Greece and Ireland. Similarly, for Non-Eurozone states, with the exclusion of Czech Republic, all states show the consecutive correlativity in degrees. Whereas, during crisis period sample, all examined markets exhibit the consecutive correlativity. The squared remainders in both Eurozone and non-Eurozone besides show consecutive correlativity in both samples, proposing the being of the volatility constellating associated with ARCH procedure in these series.
4.1. The DCC theoretical account and appraisal consequences
Table 7 ( Panel-A ) presents the consequences of the multivariate DCC-GARCH theoretical account between USA and GIPSI states. This is chiefly to analyse the impact of US Subprime crisis on GIPSI states and how US economic system affairs for these crisis states, by presenting USA in average equation. It can be observed that the changeless term in the average equation ( Eq. ( 1 ) ) is statistically undistinguished for all markets ( with the exclusion of Greece ) . The AR ( 1 ) term in the average equation, I?1, is statistically important for Spain, Ireland and Italy. The consequence ( I?2 ) of the US on GIPSI stock returns is extremely important and systematically of big magnitude, corroborating the influential function of the US stock market on the GIPSI stock markets. The consequences have strong deductions for the on-going Eurozone crisis, as it besides highlights the important impacts of recent US crisis on GIPSI states ‘ stock markets.
[ Insert Table 7 here ]
After this we analyze the impact of GIPSI states on Eurozone and Non-Eurozone states. The consequences are shown in Table 7 ( Panel B to M ) . The consequences exhibit the consequence ( I?2 ) as in equation 2 and 3 is important with positive co-efficient for each GIPSI stock markets on Eurozone and Non-Eurozone stock markets, foregrounding the extremely and positive relationship between both set of stock markets and GIPSI. The significance degree of the AR ( 1 ) term in the average equation, ( I?1 ) is at discrepancy for most of the GIPSI states. The empirical consequences of DCC ( 1, 1 ) parametric quantities ( a+b ) as in equation ( 5 ) indicate that both the parametric quantities in instance of all sampled states are extremely important, connoting a significant time-varying co-movement. Furthermore, the conditional correlativities besides exhibited high continuity, with the mean amount of the two coefficients ranges between 0.65 to 0.99 during the sample period. The staying rows are parameter estimations of the mean and conditional discrepancy equations for the stock market returns examined. Furthermore, it was shown that the coefficients for the lagged conditional volatility and Iµ2 footings in the discrepancy equation were extremely important, warranting the rightness of the GARCH ( 1, 1 ) specification.
Several surveies have used the pair-wise conditional correlativities to exhibit the contagious disease effects during periods of fiscal convulsion. Boyer, Kumagai, and Yuan ( 2006 ) calls contagious disease a phenomenon which can either be investor induced through portfolio rebalancing or cardinal based. The latter can be associated with what has been described by Forbes and Rigobon ( 2002 ) as mutuality, while the former instance is described in behavioural finance literature as herding. Herding majorly occurs when a pool of investors starts following other investors, and has been defined as the “ convergence of behaviours ” ( see for example, Hirshleifer and Teoh ( 2003 ) . Some recent empirical surveies ( see Corsetti, Pericoli, and Sbracia 2005 ; Boyer et Al 2006 ; Chiang et Al 2007 ; Bekaert and Harvey 2000 and Jeon and Moffett 2010 ; Syllignakis and Kouretas 2010 & A ; 2011 ; Kenourgios et Al 2011 ; Kenourgios and Padhi 2012 ; Suardi 2012 ) used the dynamic conditional correlativities step to look into possible crowding behaviour every bit good as contagious disease effects in emerging fiscal markets during crises periods.
[ Insert Table 8 here ]
We following move to the treatment of the estimated conditional correlativity coefficients. In Table 8, we exhibit the conditional mean correlativities between GIPSI including USA and sampled EMU and Non-EMU states. In add-on, the crisis period correlativity consequences are farther compared with stable period. Among all GIPSI states, the conditional correlativity of Spain is highest with EMU and Non-EMU states compared to stable period. The highest correlativity is found between Spain and France ( 0.80 ) . Furthermore, based on the magnitude of correlativity coefficients of GIPSI with EMU states, the most contagious states apart from Spain are Portugal, Italy, Ireland and Greece. For Non-EMU states, it is Spain followed by Italy, Ireland, Greece and Portugal. The lowest correlativity is found in instance of USA which ranges between 0.39 ( France ) to -0.035 ( Slovakia ) for EMU. In instance of Non-EMU, it ranges between 0.36 ( UK ) to 0.14 ( Czech Republic ) .
Based on the correlativity consequences, it can be concluded that among all GIPSI states, the most contagious state is Spain followed by Portugal and Italy. The magnitude of contagious disease of Greece and Ireland is limited for Euroarea states. The consequences have strong deductions from the point of position of policy penchant given to troubled states. Based on our findings, it the Spain which is most vulnerable for European Union followed by Italy and Portugal. Thus, based on the empirical consequences obtained from stock market correlativities entirely, it can be suggested that the focal point of EU stableness plan must hold particular accent on resuscitating the basicss of these economic systems instead than over stressing the Greece, though it should besides be given due considerations owing to its strong economic linkages. However, the consequences besides reveal that the correlativity coefficients with regard to Slovakia are low and by and large non statistically important and this may be an indicant for geographic non-proximity as a ground for lower contagious disease. From the position of US and other planetary investors, the Euro-zone markets shall supply low variegation benefits during the crisis period owing to the crowding behavior by investors triggered by fiscal contagious disease with the exclusion of Slovakia, which can be under consideration in the state choice procedure. Further, the EMU states seem to be even less feasible in strategic plus allotment compared to non-EMU states owing to the stronger contagious disease with GIPSI states.
4.2. Time-varying cross market co-movements
In this subdivision, we analyze the time-varying cross market correlativities for sample states. In the literature, the surveies of Connolly, Strivers, and Sun ( 2007 ) , Aydemir ( 2008 ) and Cai, Yeutien Chou, and Li ( 2009 ) have provided the grounds of stronger international market linkages when the degree of hazard is higher. For this, we estimated the undermentioned equation
Where, is the estimated pair-wise conditional correlativity co-efficient between the stock market returns of the GIPSI/USA and sample Euroarea and Non-Euroarea stock markets, such that i=GIPSI states /USA and j=sampled Euroarea and Non-Euroarea states. is the conditional volatility of each of sample Euroarea and Non-Euroarea states and is the conditional volatility of GIPSI states. The consequences shown in Table 9 shows the coefficients are stronger positive for all markets in Euroarea ( with the exclusion of Slovakia with USA ) and it ranges between -0.002 to 0.0412. A positive suggests that conditional correlativities between the GIPSI/USA market rise with the volatility of the Euroarea/Non-Euroarea market and vice-versa. The consequences have strong deductions for investors in doing variegation schemes particularly when the stock market returns of GIPSI and USA markets are above norm. In instance of Non-Euroarea states, the coefficients are all positive and important with the exclusion of UK in instance of Greece, exhibiting negative relationship. Furthermore, the explanatory power of arrested development consequences is besides high ( Adjusted R2 ) . In instance of EMU states, it ranges from 0.61 % to 0.90 % . Similarly for Non-Euroarea states, Adj.R2 is comparatively low and ranges from 0.11 % to 0.84 % . Among all contagious stock markets ( GIPSI and USA ) , it is the Italy which shows highest Adj.R2 values with France and other EMU states followed by Spain, USA, Portugal, Greece and Ireland. While for non-EMU states, the strongly linked is Italy, Portugal, Spain, Ireland, USA and Greece.
These consequences imply that among GIPSI states, Italy, Spain and Portugal are the most contagious states which are strongly linked with all major economic systems in Euro-area. Post sub-prime period of USA is still holding greater impact on Euroarea and Non-Euroarea states, connoting that USA determines the motions of stock market in these parts. From investor ‘s position, it seems hard to lump out any economic system in Euroarea and Non-Euroarea, given their important relationship with GIPSI and US stock markets. Our consequences suggest that excluding Slovakia, uniting these states shall supply small or no variegation benefits to portfolio directors.
[ Insert Table 9 here ]
Following, we construct a GIPSI Crisis Index ( henceforth, GCI ) based on the stock market returns of five GIPSI countries.4This is chiefly to analyze the combined effects of GIPSI states on Euroarea and Non-Euroarea states. The consequences, shown in Table 10 ( Panel A and B ) , indicate that the consequence of GCI on Euroarea and Non-Euroarea stock markets are extremely important and systematically of big magnitude, corroborating the influential function of the GIPSI states on the Euroarea and Non-Euroarea stock markets. The DCC ( 1, 1 ) parametric quantities ( a+b ) are high important. While, analyzing the cross market co-movements, the consequences indicate that the mean conditional correlativity of GCI ranges between 0.29 and 0.90, connoting that the combined effects of GCI states on Euroarea markets are far stronger than their single effects. Similar consequences are observed for Non-Euroarea states, the mean dynamic conditional correlativity ranges between GCI and Non-Euroarea states ranges between 0.66 and 0.73. It may be pointed out that the most vulnerable state is France ( 0.90 ) followed by Belgium ( 0.88 ) , Netherlands ( 0.86 ) and Germany ( 0.84 ) while least wedged is Slovakia ( 0.29 ) .
[ Insert Table 10 here ]
The cross market co-movement arrested development consequences as shown in equation 6 indicates the coefficients in instance of Euroarea are important and positive implying that the conditional volatility of GIPSI market drives the correlativity between GIPSI and Euroarea markets ( see Table 11 ) . Similarly, for Non-Euroarea states, the consequences are consistent with Euroarea consequences, bespeaking that crisis in GIPSI states has impacted most of the states in Euroarea and Non-Euroarea groups ( with the exclusion of Slovakia ) . Adj.R2 of arrested development consequences are higher for Euroarea states compared to Non-Euroarea, confirming the fact that Euro-area states are strongly linked with GIPSI states compared to Non-Euroarea. This could be due to common pecuniary unit and a greater co-ordination in their pecuniary policies.
[ Insert Table 11 here ]
5. Decision and treatment
In this survey, we examined the fiscal contagious disease effects of GIPSI and USA on Euroarea and Non-Euroarea states utilizing the day-to-day informations from January 5, 1996-January 31, 2012. Using multivariate DCC-GARCH theoretical account, the consequences indicate the important fluctuation in the conditional correlativities during ongoing European fiscal crisis ( May 2009-January 2012 ) . The analysis of dynamic conditional correlativity provides significant grounds about the presence of fiscal contagious disease due to crowding behavior in the fiscal markets of the sample Euroarea and Non-Euroarea states. This may be attributed to the common currency country, engagement of foreign investors every bit good as strong informational linkages, peculiarly after the realisation of 3rd phase of Euroarea. Further the consequences suggest that among GIPSI states, the most contagious state for Euroarea is Spain followed by Portugal, Italy and Ireland while Greece is comparatively least contagious. For Non-Euroarea states, it is Spain followed by Italy, Ireland and Greece and least contagious is Portugal. This is farther substantiated by the arrested development consequences of the conditional correlativities with the conditional volatility during turmoil period of 2009-2012. Harmonizing to arrested development consequences, for Euroarea it is the Italy followed by Spain, USA and Portugal, while, Italy, Portugal and Spain for non-Euroarea are identified as major beginnings of contagious disease. We besides construct a GIPSI crisis index ( GCI ) consequences to detect the impact of these economic systems on Euroarea and Non-Euroarea states. The consequences suggest that the combined effects of GIPSI states on Euroarea and Non-Euroarea are far stronger than their single effects of any of the GIPSI states. Among Euroarea states, France is strongly impacted by Spain, Italy and Portugal, followed by Netherlands, Belgium and Germany. While, for non-Euroarea states, the strongly linked stock markets are UK, Sweden, Norway and Hungary which are impacted by Spain, Italy and Portugal.
Therefore, from policy point of position, our findings suggest that among GIPSI states, the most contagious states are Spain, Italy and Portugal. Thus, the focal point of Financial Stability Board ( FSB ) with its ambitious program of European Financial Stability Facility ( EFSF ) must give particular accent on resuscitating the macroeconomic every bit good as stock market basicss of these economic systems instead than over stressing on the Greece economic system, though it should besides be given due considerations owing to its strong economic linkages. From the position of US and other planetary investors, the Eurozone markets shall supply low variegation benefits during the crisis period owing to the crowding behavior by investors triggered by fiscal contagious disease with the exclusion of Slovakia, which could be under consideration in the state choice procedure. Further, the Euroarea states seem to be even less feasible in strategic plus allotment compared to Non-Euroarea states owing to the stronger contagious disease with GIPSI states. This may be due to common currency and greater pecuniary co-ordination. However, the empirical consequences besides suggest that the station sub-prime period of USA is still holding great impact on European stock markets, connoting that USA determines the motions of stock market in Europe.
Therefore, the on-going turbulences in European market supply small range of farther enlargement of Euro-area, refering the strong contagious disease effects. Hence, fiscal contagious disease seems to be a instance against any farther fiscal integrating in the European Union. The survey contributes to fiscal contagious disease literature for European market and is relevant peculiarly in the visible radiation of current Euro-zone crisis taking raising concerns about common currency and acceptable grade of fiscal integrating.
2. Syllignakis and Kouretas ( 2011 ) screen sufficiently big figure of surveies which could be a good mention for more inside informations.
3. When informations were unavailable, because of national vacations, bank vacations, or any other grounds, stock monetary values were assumed to remain the same as those of the old twenty-four hours. Two yearss turn overing norm has non been considered in this survey due to terrible autocorrelation job as highlighted by Chiang et Al. ( 2007 ) .
4. Principle component analysis is used to build the crisis index. To salvage the infinite, the consequences are available upon petition.