The Transmission of the US Stock Market Crash of 2008 to the European Stock Markets: An Applied Time Series Investigation

This study investigates the direction and magnitude of the financial links between the European stock markets and the U.S. stock market before, during, and after the stock market crash of 2008, with an emphasis on the Central European countries. Our dataset consists of daily data for the S&P 500 and the EURO STOXX 50 indexes from January 2000 to May 2013, and also a new index which has been defined to measure the Central European countries stock market prices. The results show that there is an immediate response of the European markets to a price change in the U.S. stock market while the reverse relationship takes longer to develop. After the financial crisis, the bilateral relationship happens in a shorter period of time. We show that although the Central European stock markets are segmented from the U.S. market before the crisis, they become linked during the crisis and stay connected even after the crisis. Also, the quantitative results of the study show a significantly higher impact of the U.S. stock market on the Europe stock markets during the recent financial crisis, while this effect is decreasing after the crisis.