Deciphering financial contagion in the euro area during the crisis

Albi Tola and Sébastien Wälti
Authors registered in the RePEc Author Service: Sébastien Waelti

MPRA Paper from University Library of Munich, Germany

Abstract: Financial market interdependence has been at the epicenter of the crisis in the euro area. This paper tests for the existence of financial contagion during this crisis, defined as the international transmission of country-specific shocks beyond the normal channels of financial interdependence. Since contagion relates purely to country-specific shocks, we combine the standard contagion test of Favero and Giavazzi (2002) with an innovative narrative approach to separate out global and euro area shocks from country-specific shocks. Financial contagion has been widespread during the crisis in the euro area. About 80 percent of country-specific shocks are contagious. We also find significant evidence of flight-to-safety effects between the core and the periphery of the euro area. Global and euro area shocks have been important drivers of sovereign bond yields in the euro area.

Keywords: contagion; sovereign bond; euro; financial crisis; narrative approach (search for similar items in EconPapers)
JEL-codes: E44 F34 F36 G01 G12 (search for similar items in EconPapers)
Date: 2012-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Deciphering financial contagion in the euro area during the crisis (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:49251

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