An Empirical Assessment of the Contagion Determinants in the Euro Area in a Period of Sovereign Debt Risk

Hazar Altınbaş, Vincenzo Pacelli and Edgardo Sica
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Hazar Altınbaş: Beykent University
Vincenzo Pacelli: University of Bari Aldo Moro

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2022, vol. 8, issue 2, No 4, 339-371

Abstract: Abstract This paper uses learning methods and optimization techniques to investigate the determinants of shock propagation in the Euro area for the period 2001–2015. First, principal component analyses are used with country bond yields to identify sub-periods and country groups; second, influencing factors for country bond yields are investigated with random forest models; lastly, shock propagation among groups are examined with impulse response functions. Models in steps two and three are improved by using simulated annealing algorithm. The empirical findings achieved can be particularly relevant for both investors and policymakers. Shedding light on the determinants of financial contagion may be in fact useful for investors who can derive relevant information about countries which are less sensitive to be affected by shocks, orienting thus their investment strategies. At the same time, policymakers could draw worthwhile and preventive hedging strategies and design the most suitable crisis management policies.

Keywords: Contagion; Euro area; Sovereign debt; Time-series analysis; Machine learning; Optimization (search for similar items in EconPapers)
JEL-codes: C3 C4 F36 G1 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s40797-021-00147-2

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