 Investor induced contagion during the banking and European sovereign debt crisis of 2007–2012: Wealth effect or portfolio rebalancing?Dimitris Petmezas and Daniel Santamaria Journal of International Money and Finance, 2014, vol. 49, issue PB, 401-424 Abstract: This study investigates the way a crisis spreads within a country and across borders by testing the investor induced contagion hypothesis through the liquidity channel on stock-bond relationships of the US and five European countries before and during the global banking and European sovereign debt crisis of 2007–2012. We provide evidence consistent with the wealth effect as a source of contagion for the majority of countries. Nevertheless, we uncover evidence of investor induced contagion sourced by the portfolio rebalancing effect for correlations involving Spanish and Italian bonds during the debt crisis. Further, we find that tight (narrow) credit spreads reduce (magnify) the wealth and portfolio rebalancing effects, which are offset by the opposite effects of risk aversion amongst investors, a dynamic that is not restricted to crisis periods. Keywords: Contagion; Wealth effect; Portfolio rebalancing; Banking crisis; Sovereign debt crisis; Stock-bond relationships (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:49:y:2014:i:pb:p:401-424 DOI: 10.1016/j.jimonfin.2014.06.005 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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