Transmission of stock prices amongst European countries before and during the Greek sovereign debt crisis

Abstract

This article employs the lag-augmented VAR (LA-VAR) approach developed by Toda and Yamamoto (1995) to analyze the transmission of stock indices among the European PIIGS (Portugal, Ireland, Italy, Greece and Spain), Germany and the UK before and during the European sovereign debt crisis. The entire sample period is broken down into two periods: Sample A (from January 2, 2007 to November 4, 2009) and Sample B (from November 5, 2009 to June 30, 2011). Our analysis revealed evidence of interdependence as reflected by the Granger causality primarily from Portugal and Ireland to several countries including Germany prior to the crisis. The study also found that a significant causal relationship mostly disappeared during the Greek sovereign debt crisis.