The Euro Area Sovereign Debt Crisis: Can Contagion Spread from the Periphery to the Core?

Gutenberg School of Management and Economics Discussion Paper No. 1208

54 Pages Posted: 9 May 2012 Last revised: 26 Mar 2013

See all articles by Denis Gorea

Denis Gorea

Bank for International Settlements (BIS)

Deyan Radev

Sofia University, Faculty of Economics and Business Administration

Date Written: March 24, 2013

Abstract

We examine the determinants of joint default risk of Euro Area countries during 2007-2011. To accomplish this, we recover joint default probabilities from individual CDS contracts. In contrast to earlier theoretical studies, we find that financial linkages are an active contagion transmission channel only in the case of the troubled periphery Euro Area economies. During the current sovereign debt crisis, real economy linkages play a more important role in transmitting shocks from the Euro Area periphery towards its core. Countries that have stronger trade interconnections with troubled economies tend to have a higher expected joint default risk.

Keywords: Sovereign Debt, Tail Risk, Contagion

JEL Classification: G01, G15

Suggested Citation

Gorea, Denis and Radev, Deyan, The Euro Area Sovereign Debt Crisis: Can Contagion Spread from the Periphery to the Core? (March 24, 2013). Gutenberg School of Management and Economics Discussion Paper No. 1208, Available at SSRN: https://ssrn.com/abstract=2054696 or http://dx.doi.org/10.2139/ssrn.2054696

Denis Gorea

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Deyan Radev (Contact Author)

Sofia University, Faculty of Economics and Business Administration ( email )

15, Tzar Osvoboditel Blvd.
Sofia, 1504
Bulgaria

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