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Contagion Dynamics in EMU Government Bond Spreads

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  • Christian Leschinski, Christian
  • Bertram, Philip
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    Abstract

    There is a growing consensus that part of the surge in government bond spreads during the EMU debt crisis can be explained by wake-up-call contagion. Evidence on pure contagion however is very mixed and there are no insights into the dynamics of these effects. As a contribution to fill this gap, we apply the canonical contagion framework of Pesaran and Pick [2007], similar to Metiu [2012], for daily data from January 2002 until May 2013. By adapting the contagion function used by Metiu [2012], we are able to identify the contagion effects originating from each of the crisis countries using a two-stage least squares estimator in a rolling window. This procedure allows us to analyze changes of the contagion coefficients over time. We find that pure contagion appears as early as February 2007 (coinciding with the very first manifestations of the subprime mortgage crisis) which is before the bankruptcy of Lehman Brothers and thus much earlier than the Greek deficit revision. The effects have a stronger impact during the subprime crisis than during the EMU crisis and the main sources of pure contagion effects are Spain, Italy and Ireland whereas Greece plays only a minor role.

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    Bibliographic Info

    Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-515.

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    Length: 15 pages
    Date of creation: Aug 2013
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    Handle: RePEc:han:dpaper:dp-515

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    Keywords: contagion; sovereign risk; bond spreads;

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    References

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    1. Pesaran, M.H. & Weiner, S.M., 2001. "Modelling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Cambridge Working Papers in Economics 0119, Faculty of Economics, University of Cambridge.
    2. Hashem Pesaran & Andreas Pick, 2004. "Econometric Issues in the Analysis of Contagion," Money Macro and Finance (MMF) Research Group Conference 2004 67, Money Macro and Finance Research Group.
    3. Arghyrou, Michael G. & Kontonikas, Alexandros, 2011. "The EMU sovereign-debt crisis: fundamentals, expectations and contagion," SIRE Focus Papers 2011-01, Scottish Institute for Research in Economics (SIRE).
    4. Mervyn A. King & Sushil Wadhwani, 1989. "Transmission of Volatility Between Stock Markets," NBER Working Papers 2910, National Bureau of Economic Research, Inc.
    5. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Working Paper Series 1625, European Central Bank.
    6. Taimur Baig & Ilan Goldfajn, 1999. "Financial Market Contagion in the Asian Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 3.
    7. Pagano, Marco & von Thadden, Ernst-Ludwig, 2004. "The European Bond Markets Under EMU," CEPR Discussion Papers 4779, C.E.P.R. Discussion Papers.
    8. Sibbertsen, Philipp & Wegener, Christoph & Basse, Tobias, 2014. "Testing for a break in the persistence in yield spreads of EMU government bonds," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 109-118.
    9. Raffaela Giordano & Marcello Pericoli & Pietro Tommasino, 2013. "Pure or wake-up-call contagion? Another look at the EMU sovereign debt crisis," Temi di discussione (Economic working papers) 904, Bank of Italy, Economic Research and International Relations Area.
    10. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR & CES & MSH, vol. 24, pages 191-240, 04.
    11. Favero, Carlo A., 2013. "Modelling and forecasting government bond spreads in the euro area: A GVAR model," Journal of Econometrics, Elsevier, vol. 177(2), pages 343-356.
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    Cited by:
    1. Ludwig, Alexander, 2013. "Sovereign risk contagion in the Eurozone: a time-varying coefficient approach," MPRA Paper 52340, University Library of Munich, Germany.

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