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Contagion Dynamics in EMU Government Bond Spreads

Christian Leschinski and Philip Bertram

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: There is a growing consensus that part of the surge in government bond spreads during the EMU debt crisis can be explained by wake-up-call contagion. Evidence on pure contagion however is very mixed and there are no insights into the dynamics of these effects. As a contribution to fill this gap, we apply the canonical contagion framework of Pesaran and Pick [2007], similar to Metiu [2012], for daily data from January 2002 until May 2013. By adapting the contagion function used by Metiu [2012], we are able to identify the contagion effects originating from each of the crisis countries using a two-stage least squares estimator in a rolling window. This procedure allows us to analyze changes of the contagion coefficients over time. We find that pure contagion appears as early as February 2007 (coinciding with the very first manifestations of the subprime mortgage crisis) which is before the bankruptcy of Lehman Brothers and thus much earlier than the Greek deficit revision. The effects have a stronger impact during the subprime crisis than during the EMU crisis and the main sources of pure contagion effects are Spain, Italy and Ireland whereas Greece plays only a minor role.

Keywords: contagion; sovereign risk; bond spreads (search for similar items in EconPapers)
JEL-codes: C32 C36 G01 G15 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2013-08
New Economics Papers: this item is included in nep-eec and nep-spo
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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