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Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates

  • Theoharry Grammatikos

    ()

    (Luxembourg School of Finance, University of Luxembourg)

  • Robert Vermeulen

    ()

    (De Nederlandsche Bank, The Netherlands)

This paper tests for the transmission of the 2007-2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, whereas the increase in dependence of European financials on US financials is rather limited. Second, in order to test how the sovereign debt crisis affected stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in Greek CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is not present for non-financials. Third, before the crisis euro appreciations are associated with European stock market decreases, whereas during the crisis this is reversed. Finally, the reversal in the relationship between the euro-dollar exchange rate and stock prices seems to have been triggered by Lehman’s collapse.

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Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 10-13.

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Date of creation: 2010
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Handle: RePEc:crf:wpaper:10-13
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  1. Ferreira, Miguel A. & Gama, Paulo M., 2007. "Does sovereign debt ratings news spill over to international stock markets?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3162-3182, October.
  2. Dooley, Michael & Hutchison, Michael, 2009. "Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1331-1349, December.
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  8. Michel Beine & Gunther G. Capelle-Blancard & Hélène Raymond, 2008. "International nonlinear causality between stock markets," ULB Institutional Repository 2013/167466, ULB -- Universite Libre de Bruxelles.
  9. Vance L. Martin & Mardi Dungey, 2007. "Unravelling financial market linkages during crises," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 89-119.
  10. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  11. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
  12. Dunne, Peter & Hau, Harald & Moore, Michael, 2010. "International order flows: Explaining equity and exchange rate returns," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 358-386, March.
  13. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
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