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Determinants of sovereign bond yield spreads and contagion in the peripheral EU countries

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  • Silvapulle, Param
  • Fenech, Jean Pierre
  • Thomas, Alice
  • Brooks, Rob

Abstract

This paper investigates the contagion effects in the daily bond yield spreads (relative to Germany) of five peripheral EU countries including Portugal, Italy, Ireland, Greece and Spain, as a consequence of the recent euro-debt crisis, by employing a robust semiparametric copula method. Furthermore, we model both the means and volatilities of daily bond yield spreads in terms of potential determinants. By doing so, we obtain “other effects” free sovereign bond spreads, which together with the robust copula method would correctly uncover the core contagion, when present. The empirical results indicate that the German stock index return, the Euro Interbank Offered Rate, stock index returns of these countries, S&P 500 returns, VIX and sovereign debt ratings have had significant impacts on the bond yield spreads and/or volatilities, particularly in the post-crisis period. We find overwhelming evidence of financial contagion effects among the peripheral countries. The two large countries Spain and Italy appear to be operating independent of each other, whereas Ireland, Greece and Portugal are found to be the exporters of contagion. In globally interconnected financial markets, central bankers and policy makers are concerned about contagion, through which the crisis proliferates around the region and beyond, triggering instability in the financial markets. Thus, our findings have implications for international policy debate, debt crisis risk management and financial market participants.

Suggested Citation

  • Silvapulle, Param & Fenech, Jean Pierre & Thomas, Alice & Brooks, Rob, 2016. "Determinants of sovereign bond yield spreads and contagion in the peripheral EU countries," Economic Modelling, Elsevier, vol. 58(C), pages 83-92.
  • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:83-92
    DOI: 10.1016/j.econmod.2016.05.015
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    Cited by:

    1. repec:eee:ecmode:v:64:y:2017:i:c:p:178-200 is not listed on IDEAS
    2. António Afonso & João Tovar Jalles & Mina Kazemi, 2019. "The Effects of Macroeconomic, Fiscal and Monetary Policy Announcements on Sovereign Bond Spreads: An Event Study from the EMU," Working Papers REM 2019/67, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    3. repec:eee:ecmode:v:73:y:2018:i:c:p:378-394 is not listed on IDEAS
    4. Afonso, António & Tovar Jalles, João, 2019. "Quantitative easing and sovereign yield spreads: Euro-area time-varying evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 208-224.
    5. Martin, Franck & Zhang, Jiangxingyun, 2017. "Modelling European sovereign bond yields with international portfolio effects," Economic Modelling, Elsevier, vol. 64(C), pages 178-200.
    6. Franck Martin & Jiangxingyun Zhang, 2017. "Impact of QE on European sovereign bond market," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2017-04, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    7. Marta Gómez-Puig & Simón Sosvilla-Rivero & Manish K. Singh, 2018. "“Incorporating creditors' seniority into contingent claim models:Application to peripheral euro area countries”," IREA Working Papers 201803, University of Barcelona, Research Institute of Applied Economics, revised Feb 2018.
    8. repec:eee:ecmode:v:67:y:2017:i:c:p:275-284 is not listed on IDEAS
    9. Fiala, Tomas & Havranek, Tomas, 2017. "The sources of contagion risk in a banking sector with foreign ownership," Economic Modelling, Elsevier, vol. 60(C), pages 108-121.
    10. repec:eee:intfin:v:53:y:2018:i:c:p:263-286 is not listed on IDEAS

    More about this item

    Keywords

    Sovereign debt; Debt crisis; Contagion; Global financial crisis; Semi-parametric method;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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