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Animal spirits vs contagion: which one is the main driver of sovereign yields in Europe?

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  • Miguel Homem Ferreira
  • Luis Catela Nunes
  • Jose Tavares

Abstract

The objective of this paper is to assess the differences between contagion and investors’ risk aversion in terms of their impact on European sovereign bond yields during the financial crisis. This paper evaluates contagion at banking level, as it has the advantage of capturing the exposure of sovereign debt markets to financial sector’s risk and also the contagion between sovereign spreads that occurs through the financial sector channel. The paper analyzes the period from 2008 to 2012 and also the Greek, Portuguese and Spanish bailout periods. The results indicate that the main driver of yields in Europe is risk aversion and not contagion. The main differences between Central and Southern European countries’ yields are explained by risk aversion. This channel has a much stronger impact on the periphery. On the other hand, contagion exerts a similar influence throughout all European countries.

Suggested Citation

  • Miguel Homem Ferreira & Luis Catela Nunes & Jose Tavares, 2016. "Animal spirits vs contagion: which one is the main driver of sovereign yields in Europe?," Nova SBE Working Paper Series wp604, Universidade Nova de Lisboa, Nova School of Business and Economics.
    • Handle: RePEc:unl:unlfep:wp604
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