Returns and volatility connectedness among the Eurozone equity markets

Abstract

AbstractThe rising degree of integration among different countries around the world calls for the examination of cross‐country connectedness across equity markets. Moreover, the interconnection among some countries – bound by their common economic policies, treaties and agreements, such as Eurozone countries – is stronger than among others. Strong inter‐country ties may cause an intense connectedness among their financial systems. This study examines the returns and volatility connectedness among the equity markets of the Eurozone countries. Using the TVP‐VAR model, we document strong connectedness among their stock markets. The net transmitters of shocks are the most developed Eurozone stock markets, while Lithuania, Slovenia and Slovakia are among the most vulnerable to risks from the more developed Eurozone economies. Thus, for any event that triggers risk transmission across the Eurozone equity markets, equity investors in less developed countries will be more vulnerable to risks from the nine more developed economies.