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Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates

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Author Info

  • Theoharry Grammatikos

    ()
    (Luxembourg School of Finance, University of Luxembourg)

  • Robert Vermeulen

    ()
    (De Nederlandsche Bank, The Netherlands)

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    Abstract

    This paper tests for the transmission of the 2007-2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, whereas the increase in dependence of European financials on US financials is rather limited. Second, in order to test how the sovereign debt crisis affected stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in Greek CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is not present for non-financials. Third, before the crisis euro appreciations are associated with European stock market decreases, whereas during the crisis this is reversed. Finally, the reversal in the relationship between the euro-dollar exchange rate and stock prices seems to have been triggered by Lehman’s collapse.

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    Bibliographic Info

    Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 10-13.

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    Date of creation: 2010
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    Handle: RePEc:crf:wpaper:10-13

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    Related research

    Keywords: financial crisis; euro exchange rate; EMU; equity markets; sovereign debt;

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    1. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
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    Cited by:
    1. Jan Babecky & Tomas Havranek & Jakub Mateju & Marek Rusnak & Katerina Smidkova & Borek Vasicek, 2012. "Early Warning Indicators of Economic Crises," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2011/2012, chapter 0, pages 112-117 Czech National Bank, Research Department.
    2. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2012. "Leading indicators of crisis incidence: evidence from developed countries," Working Paper Series 1486, European Central Bank.

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