Abstract: A hidden Markov chain is introduced to drive both volatilities and correlations into dynamic conditional correlation multivariate GARCH model, which can put direct analysis to volatilities and correlations under one framework. Then the contagion resulted from American subprime mortgage crisis and European sovereign debt crisis among the major stock markets is in restigated. The findings are firstly, the regime of high volatility with high correlation, which dominates the market during crises, provides a direct way of expression to the concept of comovement. Second, the American subprime mortgage crisis and European sovereign debt crisis are contagious and emerge in the form of intervals, and show the market transfer between different regimes more frequent in the early stage of these crises. So it is arbitrary to investigate crisis contagion based on dividing sample into subsamples according to prior breakpoints. Third, it is necessary for countries to cooperate with each other because the contagion resulted from American subprime mortgage crisis and European sovereign debt crisis both are a systemic risk among the investigated markets. Finally, there is evidence that American subprime mortgage market encounters dilemma in mid-2006 and the countries involved miss the time to analyze and response to the crisis.

Key words: volatility, correlation, Markov, regime switching, crisis contagion