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

Theoharry Grammatikos () and Robert Vermeulen

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: 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 Eurodollar exchange rate and stock prices seems to have been triggered by Lehman's collapse.

Keywords: financial crisis; euro exchange rate; EMU; equity markets; sovereign debt (search for similar items in EconPapers)
JEL-codes: F31 G01 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn and nep-opm
Date: 2011-03
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Related works:
Journal Article: Transmission of the financial and sovereign debt crises to the EMU: Stock prices, CDS spreads and exchange rates (2012) Downloads
Working Paper: Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:287

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