This paper presents three tests of contagion of the US subprime crisis to the European markets of the NYSE-Euronext group. Copula models are used to analyse dependence structures between the US's and the other markets in the sample, in the pre-crisis and in the subprime crisis periods. The first test assesses the existence of contagion on the relevant markets' indices, the second checks the homogeneity of contagion intensities, and the third compares contagion in financial and in industrial sectors' indices. Results suggest that contagion exists, and is equally felt, in most markets and that investors anticipated a spreading of the financial crisis to the real economy, long before such dissemination was observable.

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Understanding how financial crises spread is important for policy-makers and regulators in order to take adequate measures to prevent or contain the spread of these crises. This paper will test whether there was contagion of the subprime financial crisis to the European stock markets of the NYSE Euronext group (Belgium, France, the Netherlands and Portugal) and, if evidence of contagion is found, it will determine the investor-induced channels through which the crisis propagated. We will use copula models for this purpose. After assessing whether there is evidence of financial contagion in the stock markets, we will examine whether the 'wealth constraints' transmission mechanism prevails over the 'portfolio rebalancing' channel. An additional test looks at the interaction between stock and bond markets during the crisis and allows us to determine if the transmission occurred due to the 'cross market rebalancing' channel or the 'flying to quality' phenomenon. The tests suggest that (i) financial contagion is present in all analyzed stock markets, (ii) a 'portfolio rebalancing' channel is the most important crisis transmission mechanism, (iii) and the 'flight-to-quality' phenomenon is also present in all analyzed stock markets.

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