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

Marta Gómez-Puig () and Simon Sosvilla-Rivero ()

No 14-08, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: 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 Granger-causality 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" during the recent European debt crisis.

Keywords: Sovereign bond spreads; contagion; Granger-causality; time-varying approach; euro area; ordered logit model (search for similar items in EconPapers)
JEL-codes: C35 C53 E44 F36 G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014-05
New Economics Papers: this item is included in nep-dcm, nep-eec and nep-mac
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