Contagion among European financial indices, evidence from a Quantile VAR approach

The aim of this paper is to analyze the dynamic relationships binding European financial market indices over the decade 2013-2022. In particular, we estimate a quantile VAR to study spillovers in different volatility scenarios using a measure of realised volatility robust to jumps and microstructural noise. Our results reveal that, especially for low quantiles, the degree of implied interconnectedness between the indices is affected negatively by the Brexit and the outbreak of the Russia-Ukraine conflict, while it augments after the Covid-19 pandemic occurrence. We also found that the EU central markets (Belgian, Dutch, French, and German) are important for the stability of the Eurozone system when uncertainty increases. On the other hand, the Italian and Portuguese markets transmit spillovers when volatility is high, whereas when the volatility is moderate or reduced, they absorb spillovers. The role of Scandinavian markets is mixed since the Finnish and Swedish markets are spillover emitters, while the Danish and the Norwegian emit only when the volatility is high. Our empirical analysis provides valuable information to policymakers, practitioners, and financial institutions.