Tail Connectedness in European Equity Markets: Regime Persistence and the Role of Geopolitical Risk

Abstract

Financial networks are typically summarised by a single average-regime connectedness estimate that treats transmission as symmetric across calm and turbulent markets. Using a quantile vector autoregression on nine European equity indices from 2000 to 2026, we show that crash-regime connectedness is not an episodic crisis response but a persistent premium over the normal regime, holding steady across nearly six thousand rolling windows. We introduce Geopolitical Risk Realised Volatility, a within-month measure of geopolitical risk dispersion distinct from its level, and show that it predicts a delayed, statistically robust decoupling of tail connectedness, modest in magnitude and specific to the crash regime, that adds information beyond GPR Act’s level alone. A quantile-specific structural break test shows that the Brexit referendum permanently shifted the United Kingdom’s net shock-transmission position within the European equity network. These shocks affect connectedness only in the crash regime, a pattern an average-regime estimate does not capture.