Causality and contagion in peripheral EMU public debt markets: a dynamic approach

Marta Gómez-Puig () and Simon Sosvilla-Rivero

No 1108, Working Papers del Instituto Complutense de Estudios Internacionales from Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales

Abstract: Our research aims to analyze the causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of contagion between yields on bonds issued by different countries. In the second step, we study the determinants of these contagion episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.

Keywords: Sovereign bond yields; Causality; Time-varying contagion; Euro area; Peripheral EMU countries; Rendimientos bonos soberanos; Causalidad; Contagio variable en el tiempo; Eurozona; Países periféricos UEM. (search for similar items in EconPapers)
Pages: pages 38
Date: 2011
Note: This paper is based upon work supported by the Government of Spain and FEDER under grant number ECO2010-21787-C03-01, and ECO2008-05565. Marta Gómez-Puig wants to thank the Instituto de Estudios Fisccales for financial support and Simón Sosvilla-Rivero thanks the University of Barcelona & RFA-IREA for their hospitality. The authors also wish to thank Javier Llordén from the Euro Area Accounts and Economic Data Division of the European Central Bank for his valuable advice and help in the construction of the dataset on private debt-to-GDP by sector in each country, and Analistas Financieros Internacionales for kindly providing the credit rating dataset. All remaining errors are solely the authors’ responsibility.
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Related works:
Working Paper: Causality and contagion in peripheral EMU public debt markets: A dynamic approach (2011)
Working Paper: Causality and contagion in peripheral EMU public debt markets: a dynamic approach (2011)
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