International Transmission Mechanism of Time Varying Risk Perceptions on European Financial Markets

This research attempts to uncover the following important relationships: (i) to what extent is the risk perceptions on financial markets of one country contribute to risk perceptions on another country’s financial markets; (ii) what is the duration of such international transmission mechanism of risk perceptions (if any) across countries; (iii) what is the lead-lag relationships of international transmission of risk perceptions in European financial market system. The results of the impulse response functions generated from a five VAR model suggests the following: (i) there exists a strong linkage among the risk perceptions on financial markets across the Europe; (ii) the risk perceptions on the U.K. financial markets seems to have the strongest international spillover impact on risk perceptions on Germany, France and Spain; (iii) the risk perceptions on France and Germany are transmitted to each other to a greater extent than to U.K or Spain; (iv) Italy seems to be the most segmented economy as its risk perception is transmitted least and is also impacted to a lesser extent by an increase in risk perceptions on other economies in the region.

Key Words: International Financial Markets, Risk, International Investment

JEL Codes: G150, G170, F21

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