The Price Transmission in European Stock Markets

Keywords: error correction model (ECM), cointegration, directed acyclic graphs (DAG), financial crisis


We investigate the dynamic price relationships among ten major stock indexes in Europe before, during and after the recent financial crisis. Using an error-correction model we find that the stock markets are cointegrated with three cointegrating vectors before the crisis and that the markets are cointegrated with only one cointegrating vector during and after the crisis. We further apply directed acyclic graph (DAG) analysis on the contemporaneous correlations innovation matrix to explore the instantaneous transmission pattern. The results show that France and Spain appear to share leadership roles before the crisis while leadership role is less obvious during and after the crisis. We also find a decreasing number of instantaneous casual relationships between the markets after the crisis, indicating that the markets are becoming more independent.


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Author Biographies

Yalan Feng, California State University, Los Angeles
Assistant Professor of Finance
James Frank Refalo, California State University, Los Angeles
Professor of Finance


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How to Cite
Feng, Y., & Refalo, J. F. (2018). The Price Transmission in European Stock Markets. Applied Finance Letters, 7(1), 2-12.
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