Abstract: VAR and DCC-MGARCH models are employed to investigate the financial contagion effects during the European Sovereign debt crisis. Empirical studies performed on stock markets, such as Greece, Spanish, Irish, UK, France, Germany, USA, Japan and China, show strong evidence of financial contagion during the crisis: sharp increase in correlation, long duration and great linkages across markets. Greece is the source of contagion in this sovereign debt crisis, but the contagion effects among other European countries are not significant. A significant but lagged linkage between Chinese and European stock markets is also obtained. Besides, our empirical results indicate that the shocks of the U.S subprime crisis did not fade away until April 2009. Our analysis reveals that the European Sovereign debt crisis is due to its huge fiscal expenditure and weak economic recovery performance.

Key words: European sovereign debt crisis, financial contagion effects, VAR, DCC-MGARCH