EMU Sovereign Debt Market Crisis: Fundamentals-Based or Pure Contagion?

Research Institute of Applied Economics Working Paper No. 2014/02

31 Pages Posted: 9 May 2014

See all articles by Marta Gómez-Puig

Marta Gómez-Puig

Economic Theory Department. University of Barcelona

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: January 10, 2014

Abstract

We empirically investigate whether the transmission of the recent crisis in euro area sovereign debt markets was due to fundamentals-based or pure contagion. To do so, we examine the behaviour of EMU sovereign bond yield spreads with respect to the German bund for a sample of both central and peripheral countries from January 1999 to December 2012. First we apply a dynamic approach to analyse the evolution of the degree of Granger-causality within the 90 pairs of sovereign bond yield spreads in our sample, in order to detect episodes of significantly increased causality between them (which we associate with contagion) and episodes of significantly reduced interconnection (which we associate with immunisation). We then use an ordered logit model to assess the determinants of the occurrence of the episodes detected. Our results suggest the importance of variables proxying market sentiment and of variables proxying macrofundamentals in determining contagion and immunisation outcomes. Therefore, our findings underline the coexistence of “pure” and “fundamentals-based contagion” during the recent European debt crisis.

Keywords: sovereign bond spreads, contagion, Granger-causality, time-varying approach, euro area, ordered logit model

JEL Classification: C35, C53, E44, F36, G15

Suggested Citation

Gómez-Puig, Marta and Sosvilla-Rivero, Simon, EMU Sovereign Debt Market Crisis: Fundamentals-Based or Pure Contagion? (January 10, 2014). Research Institute of Applied Economics Working Paper No. 2014/02. Available at SSRN: https://ssrn.com/abstract=2434499 or http://dx.doi.org/10.2139/ssrn.2434499

Marta Gómez-Puig

Economic Theory Department. University of Barcelona ( email )

Diagonal 690
Barcelona, 08034
Spain
34-93-4020113 (Phone)
34-93-4039082 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Register to save articles to
your library

Register

Paper statistics

Downloads
100
rank
259,348
Abstract Views
421
PlumX Metrics