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“EMU sovereign debt market crisis: Fundamentals-based or pure contagion?”

  • Marta Gómez-Puig

    ()

    (Faculty of Economics, University of Barcelona)

  • Simón Sosvilla-Rivero

    ()

    (Department of Quantitative Economics, Universidad Complutense de Madrid)

We empirically investigate whether the transmission of the recent crisis in euro area sovereign debt markets was due to fundamentals-based or pure contagion. To do so, we examine the behaviour of EMU sovereign bond yield spreads with respect to the German bund for a sample of both central and peripheral countries from January 1999 to December 2012. First we apply a dynamic approach to analyse the evolution of the degree of Grangercausality within the 90 pairs of sovereign bond yield spreads in our sample, in order to detect episodes of significantly increased causality between them (which we associate with contagion) and episodes of significantly reduced interconnection (which we associate with immunisation). We then use an ordered logit model to assess the determinants of the occurrence of the episodes detected. Our results suggest the importance of variables proxying market sentiment and of variables proxying macrofundamentals in determining contagion and immunisation outcomes. Therefore, our findings underline the coexistence of “pure” and “fundamentals-based contagion” uring the recent European debt crisis.

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File URL: http://www.ub.edu/irea/working_papers/2014/201402.pdf
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Paper provided by University of Barcelona, Research Institute of Applied Economics in its series IREA Working Papers with number 201402.

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Length: 31 pages
Date of creation: May 2014
Date of revision: May 2014
Handle: RePEc:ira:wpaper:201402
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