How a Small Country Can Affect European Economy? The Greek Contagion Phenomenon

Abstract

This study applies the asymmetric dynamic conditional correlation (A-DCC) model in order to investigate the correlation dynamics among the Greek market and Eurozone during the recent debt crisis. Moreover, research employs copula functions in order to measure the correlation among Greek and European markets. The Greek debt crisis occurred after the subprime mortgage crisis and its consequences to the European Union are crucial. The Greek stock market followed the larger stock markets’ fluctuation. Thus, Greek government’s debt should not influence the other European markets. However, Greece is a member of the monetary union and the investigation whether the contagion effect on the other members exists or not is essential. Thus, we employ the A-DCC model in order to test for the presence of asymmetric responses in correlations to negative returns. Findings support that the contagion hypothesis exists during crash periods but not during the Greek debt crisis.