Tail Risk and Return Predictability for Europe's Capital Markets

Abstract

This chapter aims to analyze financial integration and the presence of long memories in nine capital markets in the period from June 5, 2017 to June 3, 2022. To provide robustness to the research we divide the sample into two sub-periods: tranquil and crisis (global pandemic of 2020 and the Russian invasion of Ukraine in 2022). To conduct this analysis, different approaches will be undertaken in order to analyze two research questions: (1) Do European capital markets tend towards integration in periods of extreme volatility? (2) If yes, could this phenomenon make markets predictable? When comparing the two sub-periods, the authors find that the rhoDCCA of 16 pairs of markets remained strong, while the mean trendless correlation decreased from 20 to 12, while weak correlation coefficients appeared (8) and tended towards anti-persistence.