News Flow, Web Attention and Extreme Returns in the European Financial Crisis

We examine the existence of stock market contagion effects 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 daily stock market data from January 2004 till March 2013, contagion effects for the tails of the marginal distributions are present for the Pre-crisis and the Euro-crisis periods within the Euro-periphery countries and from the Euro-periphery group to the Non-Euro and the Euro-core groups. We do not find a significant change in the contagion transmission mechanism when comparing the two periods, but for the Euro-crisis periods the extreme returns have a higher magnitude. Finally, we propose a connection between extreme stock market returns, the Web Attention index and two News Flow factors. The Euro-periphery Web Attention and News Flow variables significantly affect the probabilities of extreme bottom returns for the Euro-periphery, the Non-euro and the Euro-core groups. The effect is asymmetric in most of the cases since the Euro-periphery Web Attention and News Flow factors do not affect the probabilities of extreme top returns, with a few exceptions. More Web Attention and more bad news for the Euro-periphery in times of crisis are associated with higher probabilities of extreme bottom returns within and across groups. Granger-causality tests show that the News Pessimism and the News Relevance factors exhibit a two-way causality with the stock market movements while the Web Search Volume Index (SVI) one-way Granger-causes stock markets and extreme bottom returns in the three country groups