Measuring the impact of the GFC on European equity markets

I investigate the impact of the Global Financial Crisis (GFC) on the returns and volatilities of eleven major European share markets, and test the proposition that the GFC developed over two stages: a subprime mortgage crisis (pre-Lehman), and a more severe global liquidity shortage phase (post-Lehman). Significant structural breaks are found in the returns and volatilities associated with the two stages of the crisis. However, while there is strong statistical evidence suggesting that Phase 2 of the GFC experienced higher volatility levels than Phase 1, we are unable to reject the null that the impact on the returns was equal across the two stages. Further, it appears that the mean of the return series over the post-GFC period has returned to its pre-crisis level for all markets, whereas post-GFC volatilities remain statistically higher than their pre-crisis averages for ten of the eleven markets studied.