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Financial Contagion and the European Debt Crisis

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  • Sebastian Missio
  • Sebastian Watzka
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    Abstract

    Since the beginning of 2010, the Euro Area faces a severe sovereign debt crisis, now generally known as the Euro Crisis. While the Euro Crisis has its origin in Greece, problems have now spread to several other European countries as well. Dynamic conditional correlation models (DCC) are estimated in order to assess if contagious effects are identifiable during the Euro Crisis, or if the countries’ problems are instead due to fundamental problems in the affected economies. Our findings show that there is contagion within the Euro Area. Additionally, contagious effects generated by rating announcements are documented. These results are crucial when it comes to choosing the correct measure and timing of policy intervention.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-08/cesifo1_wp3554.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3554.

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    Date of creation: 2011
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    Handle: RePEc:ces:ceswps:_3554

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    Related research

    Keywords: contagion; DCC; Euro Crisis;

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    References

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    1. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
    2. Roberto Rigobón & Kristin Forbes, 2001. "Contagion in Latin America: Definitions, Measurement, and Policy Implications," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    3. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
    4. Silvennoinen, Annastiina & Teräsvirta, Timo, 2007. "Multivariate GARCH models," Working Paper Series in Economics and Finance 669, Stockholm School of Economics, revised 18 Jan 2008.
    5. Chiang, Thomas C. & Jeon, Bang Nam & Li, Huimin, 2007. "Dynamic correlation analysis of financial contagion: Evidence from Asian markets," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1206-1228, November.
    6. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    7. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 476-489, June.
    8. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
    9. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
    10. Marcello Pericoli & Massimo Sbracia, 2001. "A Primer on Financial Contagion," Temi di discussione (Economic working papers) 407, Bank of Italy, Economic Research and International Relations Area.
    11. Afonso, António & Furceri, Davide & Gomes, Pedro, 2011. "Sovereign credit ratings and financial markets linkages: application to European data," Working Paper Series 1347, European Central Bank.
    12. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 183-224, July.
    13. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
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    Cited by:
    1. Mark Mink & Jakob de Haan, 2012. "Contagion during the Greek Sovereign Debt Crisis," DNB Working Papers 335, Netherlands Central Bank, Research Department.
    2. Bhanot, Karan & Burns, Natasha & Hunter, Delroy & Williams, Michael, 2014. "News spillovers from the Greek debt crisis: Impact on the Eurozone financial sector," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 51-63.
    3. Ahmad, Wasim & Sehgal, Sanjay & Bhanumurthy, N.R., 2013. "Eurozone crisis and BRIICKS stock markets: Contagion or market interdependence?," Economic Modelling, Elsevier, vol. 33(C), pages 209-225.
    4. Ludwig, Alexander, 2013. "Sovereign risk contagion in the Eurozone: A time-varying coefficient approach," Dresden Discussion Paper Series in Economics 02/13, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.

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