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Identifying and measuring the contagion channels at work in the European financial crises

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  • Guidolin, Massimo
  • Pedio, Manuela

Abstract

We investigate the phenomenon of contagion with a special focus on the recent financial crisis, distinguishing four alternative channels, namely the flight-to-quality, flight-to-liquidity, risk premium, and correlated information channels. Specifically, we employ the differences among estimates and impulse response functions across linear and nonlinear models to identify and measure cross-asset contagion. An application to weekly Eurozone data for a 2007–2014 sample reveals that a two-state Markov switching model shows economically weak, though accurately estimated, contagion effects in a crisis regime. These findings are mainly explained by a flight-to-quality channel. Furthermore, we extend our analysis to explore whether European markets may or may not have been subject to contagion when exposed to external shocks, such as those originated from the US subprime crisis.

Suggested Citation

  • Guidolin, Massimo & Pedio, Manuela, 2017. "Identifying and measuring the contagion channels at work in the European financial crises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 117-134.
  • Handle: RePEc:eee:intfin:v:48:y:2017:i:c:p:117-134
    DOI: 10.1016/j.intfin.2017.01.001
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    Cited by:

    1. Buse, Rebekka & Schienle, Melanie, 2019. "Measuring connectedness of euro area sovereign risk," International Journal of Forecasting, Elsevier, vol. 35(1), pages 25-44.
    2. repec:eee:finmar:v:45:y:2019:i:c:p:83-114 is not listed on IDEAS
    3. repec:eee:ecmode:v:73:y:2018:i:c:p:222-239 is not listed on IDEAS

    More about this item

    Keywords

    Contagion channels; Markov switching models; Vector autoregressions; Impulse response function; Flight-to-quality; Flight-to-liquidity; Risk premium;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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