Contagion: Evidence from the Bond Market

Abstract:     
Using Treasury and corporate bond market data, I examine the propagation of firm-specific shocks as well as market-wide shocks between 1995-2003, testing the implications of previously proposed channels of contagion. I find little support for the economic fundamental hypothesis. Consistent with the information transmission and liquidity-shock hypotheses, I find evidence of flight to quality during the event periods. However, in contrast to the prediction of the liquidity shock hypothesis, the corporate bond market seems to be more liquid during event periods. These findings are more in favor of the information channel as a means of inducing contagion.

Number of Pages in PDF File: 49

Keywords: Contagion, Financial Crisis, Flight to Quality, Information Flow, Bond Market

JEL Classification: G14, G22, G33

working papers series