Tail dependence in European stock markets amidst the Russo-Ukrainian war: Shifting linkages and their determinants

Wojciech Grabowski and Jakub Janus

No 2024/0360, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This study investigates the impact of the Russo-Ukrainian war on stock market connectedness in 24 European economies. Using a framework based on Clayton copulas, we identify changes in the left-tail dependence of stock market returns between the war and pre-war periods and explore their determinants through limited dependent variable models. We find that the war-induced shifts in the market connectedness are significant but not uniform, involving both elevated left-tail linkages (financial contagion) and instances of diminished connectedness and increased market resilience. Such diverse changes can be attributed not only to cross-country differences in stock market volatilities and trade dynamics but also to countries' proximity to the warzone and their reliance on fossil-fuel imports, particularly their pre-war energy dependence on Russia. Our results highlight the need to consider these vulnerabilities in portfolio diversification strategies of international investors, as well as in financial stability policies.

Keywords: stock markets; tail dependence; international market connectedness; financial contagion; Russia-Ukraine war. (search for similar items in EconPapers)
JEL-codes: E44 F36 G11 G15 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cis, nep-fmk and nep-rmg
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