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Contagion and causality: an empirical analysis on sovereign bond spreads

  • Iuliana Matei

    ()

    (University of Evry and University of Paris 1)

The current decade was marked by the worst economic and financial crisis since the Great Depression, many economies experiencing a severe contraction of output in late 2008 and early 2009. But, was this evolution of the activity only the result of the domestic factors or a certain form of international contagion influenced it, at least partially? The aim of this paper is to empirically explore the contagion phenomenon during the subprime crisis for seven EU and non-EU countries. To test for contagion, we apply a Granger causality/VECM methodology on sovereign bond spreads as a measure of perceived country risk. Following partially the methodology of Kleimeier and Sander (2003), we investigate two sub-periods: a pre-crisis tranquil period (January, 1st 2003-July 29, 2007) and a crisis period (July 2, 2007 -September 1, 2009). Results highlight the fact that the causality patterns have changed during the crisis period compared to the pre-crisis tranquil period.

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File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I3-P171.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 30 (2010)
Issue (Month): 3 ()
Pages: 1885-1896

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Handle: RePEc:ebl:ecbull:eb-10-00286
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  1. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
  2. Graciela L. Kaminsky & Carmen Reinhart & Carlos A. Vegh, 2003. "The Unholy Trinity of Financial Contagion," NBER Working Papers 10061, National Bureau of Economic Research, Inc.
  3. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
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