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Deciphering financial contagion in the euro area during the crisis

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  • Tola, Albi
  • Wälti, Sébastien

Abstract

Financial market interdependence has been at the epicenter of the crisis in the euro area. This paper tests for the existence of financial contagion during this crisis, defined as the international transmission of country-specific shocks beyond the normal channels of financial interdependence. Since contagion relates purely to country-specific shocks, we combine the standard contagion test of Favero and Giavazzi (2002) with a narrative approach to separate out global and euro area shocks from country-specific shocks. Financial contagion has been widespread during the crisis in the euro area. Three quarters of country-specific shocks are contagious over the whole sample period. But the proportion of contagious country-specific shocks has fallen markedly after the “whatever it takes” announcement in July 2012.

Suggested Citation

  • Tola, Albi & Wälti, Sébastien, 2015. "Deciphering financial contagion in the euro area during the crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 108-123.
  • Handle: RePEc:eee:quaeco:v:55:y:2015:i:c:p:108-123
    DOI: 10.1016/j.qref.2014.09.009
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    Cited by:

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    4. Badarau, Cristina & Carias, Marcos & Figuet, Jean-Marc, 2020. "Cross-border spillovers of macroprudential policy in the Euro area," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 1-13.
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    6. Aristeidis Samitas & Elias Kampouris & Zaghum Umar, 2022. "Financial contagion in real economy: The key role of policy uncertainty," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1633-1682, April.
    7. Peter Schwendner & Martin Schuele & Thomas Ott & Martin Hillebrand, 2015. "European Government Bond Dynamics and Stability Policies: Taming Contagion Risks," Working Papers 8, European Stability Mechanism.
    8. Roberto Tamborini, 2015. "Heterogeneous Market Beliefs, Fundamentals and the Sovereign Debt Crisis in the Eurozone," Economica, London School of Economics and Political Science, vol. 82, pages 1153-1176, December.
    9. Roberto Tamborini, 2017. "Europe at the Interdependence War," EconPol Working Paper 2, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    10. Giuliana Passamani & Roberto Tamborini & Matteo Tomaselli, 2014. "Sustainability vs. credibility of fiscal consolidation. A Principal Components test for the Euro Zone," DEM Discussion Papers 2014/09, Department of Economics and Management.

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    More about this item

    Keywords

    Contagion; Sovereign bond; Euro; Financial crisis; Narrative approach;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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