Globalization, Regime-Switching, and EU Stock Markets: the Impact of the Sovereign Debt Crises

Abstract

The most recent models learn over time, making the necessary adjustments to a new level of peaks or troughs, which enables the more accurate prediction of turning points. The Smooth Regression Model may be regarded as having a linear and a nonlinear component and may over time determine whether there is only a linear or nonlinear component or, in some cases, both.

The present study focuses on the impact effect analysis of the European markets contamination by sovereign debt (particularly in Portugal, Spain, France and Ireland). The smooth transition regression approach applied in this study has proved to be a viable alternative for the analysis of the historical behavioural adjustment between interest rates and stock market indices. We found evidence in the crisis regime, i.e., large negative returns, especially in the case of Portugal, where we obtained the greatest nonlinear threshold adjustment between interest rates and stock market returns.