IDEAS home Printed from https://ideas.repec.org/p/aee/wpaper/1403.html
   My bibliography  Save this paper

Causality and Contagion in EMU Sovereign Debt Markets

Author

Listed:
  • Marta Gómez-Puig

    (conomic Theory Department. Universitat de Barcelona and Risk Center-IREA)

  • Simón Sosvilla-Rivero

    () (Department of Quantitative Economics, Universidad Complutense de Madrid)

Abstract

This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behaviour. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases, provide clear evidence of contagion in the aftermath of the current euro debt crisis.

Suggested Citation

  • Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "Causality and Contagion in EMU Sovereign Debt Markets," Working Papers 14-03, Asociación Española de Economía y Finanzas Internacionales.
  • Handle: RePEc:aee:wpaper:1403
    as

    Download full text from publisher

    File URL: http://www.aeefi.com/RePEc/pdf/defi14-03.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Caporin, Massimiliano & Pelizzon, Loriana & Ravazzolo, Francesco & Rigobon, Roberto, 2018. "Measuring sovereign contagion in Europe," Journal of Financial Stability, Elsevier, vol. 34(C), pages 150-181.
    2. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 162-194, June.
    3. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    4. Granger, C. W. J. & Newbold, Paul, 1986. "Forecasting Economic Time Series," Elsevier Monographs, Elsevier, edition 2, number 9780122951831 edited by Shell, Karl.
    5. Stephan Dieckmann & Thomas Plank, 2012. "Default Risk of Advanced Economies: An Empirical Analysis of Credit Default Swaps during the Financial Crisis," Review of Finance, European Finance Association, vol. 16(4), pages 903-934.
    6. Groba, Jonatan & Lafuente, Juan A. & Serrano, Pedro, 2013. "The impact of distressed economies on the EU sovereign market," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2520-2532.
    7. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    8. Kalbaska, A. & Gątkowski, M., 2012. "Eurozone sovereign contagion: Evidence from the CDS market (2005–2010)," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 657-673.
    9. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
    10. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 60-82.
    11. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-484, December.
    12. Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000. "A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(3), pages 337-354.
    13. 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.
    14. Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 717-732, October.
    15. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    16. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
    17. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    18. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    19. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    20. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 60-67, January.
    21. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2013. "Granger-causality in peripheral EMU public debt markets: A dynamic approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4627-4649.
    22. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    23. Sander, Harald & Kleimeier, Stefanie, 2003. "Contagion and causality: an empirical investigation of four Asian crisis episodes," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 171-186, April.
    24. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    25. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    26. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2005. "'Some contagion, some interdependence': More pitfalls in tests of financial contagion," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1177-1199, December.
    27. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "“EMU sovereign debt market crisis: Fundamentals-based or pure contagion?”," IREA Working Papers 201402, University of Barcelona, Research Institute of Applied Economics, revised May 2014.
    28. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    29. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
    30. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    31. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    32. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
    33. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    34. Kristin J. Forbes, 2012. "The “Big C”: identifying and mitigating contagion," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 23-87.
    35. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-273.
    36. Fernando Broner & Jaume Ventura, 2011. "Globalization and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 49-82.
    37. Cheung, Yin-Wong & Chinn, Menzie D, 1997. "Further Investigation of the Uncertain Unit Root in GNP," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 68-73, January.
    38. Metiu, Norbert, 2012. "Sovereign risk contagion in the Eurozone," Economics Letters, Elsevier, vol. 117(1), pages 35-38.
    39. Thornton, Daniel L & Batten, Dallas S, 1985. "Lag-Length Selection and Tests of Granger Causality between Money and Income," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 164-178, May.
    40. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    41. Sebastian Edwards, 2000. "Interest Rates, Contagion and Capital Controls," NBER Working Papers 7801, National Bureau of Economic Research, Inc.
    42. Geweke, John, 1984. "Inference and causality in economic time series models," Handbook of Econometrics,in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 19, pages 1101-1144 Elsevier.
    43. Kee-Hong Bae & G. Andrew Karolyi & René M. Stulz, 2003. "A New Approach to Measuring Financial Contagion," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 717-763, July.
    44. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    45. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    46. Nielsen, Bent & Rahbek, Anders, 2000. " Similarity Issues in Cointegration Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(1), pages 5-22, February.
    47. Hsiao, Cheng, 1981. "Autoregressive modelling and money-income causality detection," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 85-106.
    48. Ejsing, Jacob & Lemke, Wolfgang, 2009. "The Janus-headed salvation: sovereign and bank credit risk premia during 2008-09," Working Paper Series 1127, European Central Bank.
    49. Kristin Forbes, 2012. "The "Big C": Identifying Contagion," NBER Working Papers 18465, National Bureau of Economic Research, Inc.
    50. Sergio Andenmatten & Felix Brill, 2011. "Measuring Co-Movements of CDS Premia during the Greek Debt Crisis," Diskussionsschriften dp1104, Universitaet Bern, Departement Volkswirtschaft.
    51. Joshua Aizenman, 2013. "The Eurozone Crisis: Muddling through on the Way to a More Perfect Euro Union?," Social Sciences, MDPI, Open Access Journal, vol. 2(4), pages 1-13, October.
    52. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish; How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability," IMF Working Papers 09/108, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gómez-Puig, Marta & Sosvilla-Rivero, Simón & Ramos-Herrera, María del Carmen, 2014. "An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 133-153.
    2. Fernando Fernández-Rodríguez & Marta Gómez-Puig & Simón Sosvilla-Rivero, 2015. "“Financial stress transmission in EMU sovereign bond market volatility: a connectedness analysis”," IREA Working Papers 201508, University of Barcelona, Research Institute of Applied Economics, revised Jan 2015.
    3. Kliber, Agata & Płuciennik, Piotr, 2017. "Euro or not? Vulnerability of Czech and Slovak economies to regional and international turmoil," Economic Modelling, Elsevier, vol. 60(C), pages 313-323.
    4. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "Volatility spillovers in EMU sovereign bond markets," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 337-352.
    5. Filip Smolik & Lukas Vacha, 2015. "Time-scale analysis of co-movement in EU sovereign bond markets," Papers 1506.03347, arXiv.org, revised Mar 2016.
    6. Pragidis, I.C. & Aielli, G.P. & Chionis, D. & Schizas, P., 2015. "Contagion effects during financial crisis: Evidence from the Greek sovereign bonds market," Journal of Financial Stability, Elsevier, vol. 18(C), pages 127-138.
    7. repec:eee:finsta:v:29:y:2017:i:c:p:72-91 is not listed on IDEAS
    8. repec:eee:ememar:v:31:y:2017:i:c:p:96-115 is not listed on IDEAS
    9. Yu Hsing, 2015. "Determinants of the Government Bond Yield in Spain: A Loanable Funds Model," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 3(3), pages 1-9, July.
    10. Valerio Filoso, Valerio & Panico, Carlo & Papagni, Erasmo & Francesco, Purificato & Vázquez Suarez, Marta, 2016. "Causes and timing of the European debt crisis: An econometric evaluation," MPRA Paper 75847, University Library of Munich, Germany.
    11. Victor Echevarria Icaza & Simón Sosvilla-Rivero, 2017. "Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach," Working Papers 17-01, Asociación Española de Economía y Finanzas Internacionales.
    12. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Kumar, Ronald Ravinesh & Mensi, Walid, 2017. "Interdependence and contagion among industry-level US credit markets: An application of wavelet and VMD based copula approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 310-324.
    13. repec:eee:intfin:v:49:y:2017:i:c:p:129-139 is not listed on IDEAS
    14. Estefanía Alaminos & Mercedes Ayuso, 2015. "Methodological Approach of a Multiple State Actuarial Model for the Married - Widower case for the assessment of retirement and widowhood pensions," Working Papers 2015-04, Universitat de Barcelona, UB Riskcenter.
    15. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Using connectedness analysis to assess financial stress transmission in EMU sovereign bond market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 126-145.
    16. Pilar Abad & Helena Chulia, 2016. "European Government Bond Market Contagion in Turbulent Times," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(3), pages 263-276, June.
    17. repec:ucm:wpaper:04-15 is not listed on IDEAS
    18. Xavier Piulachs & Ramon Alemany & Montserrat Guillen, 2014. "A joint longitudinal and survival model with health care usage for insured elderly," Working Papers 2014-07, Universitat de Barcelona, UB Riskcenter.
    19. Antonakakis, Nikolaos & Christou, Christina & Cunado, Juncal & Gupta, Rangan, 2017. "Convergence patterns in sovereign bond yield spreads: Evidence from the Euro Area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 129-139.
    20. Eichler, Stefan, 2015. "How Do Political Factors Shape the Bank Risk-Sovereign Risk Nexus in Emerging Markets?," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112877, Verein für Socialpolitik / German Economic Association.
    21. Smolik, Filip & Vacha, Lukas, 2015. "Time-scale analysis of sovereign bonds market co-movement in the EU," FinMaP-Working Papers 44, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    22. Mercedes Ayuso & Montserrat Guillén & Jens Perch Nielsen, 2017. "Improving automobile insurance ratemaking using telematics: incorporating mileage and driver behaviour data," Working Papers 2017-01, Universitat de Barcelona, UB Riskcenter.
    23. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Causes and hazards of the euro area sovereign debt crisis: Pure and fundamentals-based contagion," Economic Modelling, Elsevier, vol. 56(C), pages 133-147.
    24. Chakrabarti, Avik & Zeaiter, Hussein, 2014. "The determinants of sovereign default: A sensitivity analysis," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 300-318.
    25. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "The causal relationship between debt and growth in EMU countries," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 974-989.

    More about this item

    Keywords

    Sovereign bond yields; Granger-Causality; Contagion; Euro area.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aee:wpaper:1403. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Luis Miguel del Corral Cuervo). General contact details of provider: http://edirc.repec.org/data/aeefiea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.