Extreme Returns in the European Financial Crisis

We examine the transmission of extreme stock market returns among three groups of countries:
the Euro-periphery countries (Portugal, Ireland, Italy, Greece, Spain), the Euro-core countries
(Germany, France, the Netherlands, Finland, Belgium), and the major European Union -but not
euro- countries (Sweden, UK, Poland, Czech Republic, Denmark). Using extreme returns on daily
stock market data from January 2004 till March 2013, we nd that transmission e ects are present
for the tails of the returns distributions for the Pre-crisis, the US-crisis and the Euro-crisis periods
from the Euro-periphery group to the Non-Euro and the Euro-core groups. Within group e ects
are stronger in the crisis periods. We nd that the transmission channel does not seem to have
intensi ed during the crisis periods, but it transmitted larger shocks (in some cases, extreme bottom
returns doubled during the crisis periods). Thus, as extreme returns have become much more
"extreme" during the nancial crisis periods, the expected losses on extreme return days have
increased signi cantly. Given the fact that stock market capitalisations in these country groups are
trillions of Euros, a 1% or 2% increase in extreme bottom returns (in crisis periods) can lead to
aggregate losses of tens of billions Euros in one single trading day.