The Evolution of Linkages in European Equity Markets : A Minimum Spanning Tree Analysis

The concept of a minimum spanning tree (MST) is used to study the process of comovements for 21 European Union stock market indices. We show how the asset tree and its related hierarchical tree evolve over time and describe the dynamics. Over the period studied, 1999-2006, the French equity market provides the main linkages in the system. The 2004 Accession states are more loosely connected to the other markets; they form two groupings, with the Czech Republic, Hungary, and Poland having tighter links to the main markets than the remaining accession markets. The consequence for global investors is a potential reduction of the benefits of international portfolio diversification in European markets, with the possible exception of those markets at the outer limits of the MST