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The euro area sovereign debt crisis: Can contagion spread from the periphery to the core?

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  • Gorea, Denis
  • Radev, Deyan

Abstract

We examine the determinants of joint default risk of euro area countries during 2007–2011. To accomplish this, we recover joint default probabilities from individual CDS contracts. In contrast to earlier theoretical studies, we find that financial linkages are an active contagion transmission channel only in the case of the troubled periphery euro area economies. During the current sovereign debt crisis, real economy linkages play a more important role in transmitting shocks from the euro area periphery towards its core. Countries that have stronger trade interconnections with troubled economies tend to have a higher expected joint default risk.

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  • Gorea, Denis & Radev, Deyan, 2014. "The euro area sovereign debt crisis: Can contagion spread from the periphery to the core?," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 78-100.
    • Handle: RePEc:eee:reveco:v:30:y:2014:i:c:p:78-100
    DOI: 10.1016/j.iref.2013.10.003
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    More about this item

    Keywords

    Sovereign debt; Financial distress; Tail risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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