Abstract
In this paper, we investigate the existence of financial contagion in the European Union during the recent Global Financial Crisis (GFC) of 2007–2009 and the European Sovereign Debt Crisis (ESDC) that started in 2009. Our sample includes sectorial equity indices for 15 countries from 2004 to 2014. We adopt an ADCC-GJR-GARCH model for the time-varying correlations and a Markov-Switching model to identify the lead/lag relationship in crisis transition dates across the countries and the sectors. We assess the patterns of financial contagion by sector and by country. Our results support the existence of financial contagion in all business sectors under the GFC and the ESDC. Financials and Telecommunications are the most affected, while the Industrials and the Consumer Goods the least in each crisis respectively. Stock markets in the Core EU are the most affected in both crises. We find evidence of a non-synchronised transition of all countries to the crisis regime, in both crises. We believe that our results may provide useful insights for investors and policy makers.
•We assess cross-country and cross-sector financial contagion for GFC/ESDC crises.•Financials (Telecommunications) is the most affected in the GFC (ESDC) crisis.•Industrials (Consumer Goods) is the least affected in the GFC (ESDC) crisis.•The Core EU (PIIGS) country group was affected first in the GFC (ESDC) crisis.•All countries & sectors experienced financial contagion at varying magnitudes.