Universidad Complutense de Madrid
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EMU sovereign debt market crisis: Fundamentals-based or pure contagion?

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Gómez-Puig, Marta and Sosvilla-Rivero, Simón (2014) EMU sovereign debt market crisis: Fundamentals-based or pure contagion? [ Working Papers on International Economics and Finance; nº 14-08, ISSN: 1696-6376 ]

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Abstract

We empirically investigate whether the transmission of the recent crisis in euro area sovereign debt markets was due to fundamentals-based or pure contagion. To do so, we examine the behaviour of EMU sovereign bond yield spreads with respect to the German bund for a sample of both central and peripheral countries from January 1999 to December 2012. First we apply a dynamic approach to analyse the evolution of the degree of Granger-causality within the 90 pairs of sovereign bond yield spreads in our sample, in order to detect episodes of significantly increased causality between them (which we associate with contagion) and episodes of significantly reduced interconnection (which we associate with immunisation). We then use an ordered logit model to assess the determinants of the occurrence of the episodes detected. Our results suggest the importance of variables proxying market sentiment and of variables proxying macrofundamentals in determining contagion and immunisation outcomes. Therefore, our findings underline the coexistence of “pure” and “fundamentals-based contagion” during the recent European debt crisis.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Sovereign bond spreads; Contagion; Granger-causality; Time-varying approach; Euro area; Ordered logit model
Subjects:Social sciences > Economics > Depressions
Social sciences > Economics > Econometrics
Social sciences > Economics > World economy
Social sciences > Economics > Public economy
JEL:C35, C53, E44, F36, G15
Series Name:Working Papers on International Economics and Finance
Volume:
Number:14-08
ID Code:30647
Deposited On:29 Jun 2015 10:34
Last Modified:19 Dec 2018 09:59

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