Causality and contagion in EMU sovereign debt markets

Thumbnail Image
Full text at PDC
Publication Date
Advisors (or tutors)
Journal Title
Journal ISSN
Volume Title
Google Scholar
Research Projects
Organizational Units
Journal Issue
This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behavior. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases provide clear evidence of contagion in the aftermath of the current euro debt crisis.
UCM subjects
Crisis económicas, Econometría (Economía), Economía internacional, Economía pública
Unesco subjects
5307.06 Fluctuaciones Económicas, 5302 Econometría, 5310 Economía Internacional
Aizenman J. (2013), The eurozone crisis: Muddling through on the way to a more perfect euro union? Social Sciences, 2, 221-223. Andenmatten, S. & Brill, G. (2011). Measuring co-movements of CDS premia during the Greek debt crisis. Discussion Papers 11-04, Department of Economics, University of Bern. Andrews, D. W. K. (1993). Tests for parameter instability and structural change with unknown change point. Econometrica, 61, 821-856. Andrews, D., & Ploberger, W. (1994). Optimal tests when a nuisance parameter is present only under the alternative. Econometrica, 62, 1383–1414. Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on Automatic Control, 19, 716–723. Bae, K. H., Karolyi, G. A. & Stulz, R. M. (2003). A new approach to measuring financial contagion. Review of Financial Studies, 16, 717–763. Bai, J. (1997). Estimating multiple breaks one at a time. Econometric Theory, 13, 315–352. Bai, J. & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66, 47–78. Bai, J. & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 6, 72–78. Baig, T. & Goldfajn, I. (2001). The Russian default and the contagion to Brazil. In S. Claessens & K. Forbes (Eds.), International financial contagion. Boston: Kluwer Academic Publishers. Banerjee, A., Dolado, J., Galbraith, J. & Hendry, D. (1993). Cointegration, error correction and the econometric analysis of nonstationary series. Oxford: Oxford University Press. Basse, T. (2013). Searching for the EMU core member countries, European Journal of Political Economy (in press). Basse, T., Friedrich, M. & Kleffner, A. (2012). Italian government debt and sovereign credit risk: an empirical exploration and some thoughts about consequences for European insurers, Zeitschrift für die gesamte Versicherungswissenschaft, 101, 571-579. Beirne, J. & Fratzscher, M. (2013). The pricing of sovereign risk and contagion during the European sovereign debt crisis. Journal of International Money and Finance, 34, 60-82. Bolton, P. & Jeanne, O. (2011). Sovereign default risk and bank fragility in financially integrated economies. Discussion Paper 8368, Centre for Economic Policy Research. Broner, F. & Ventura, J. (2011). Globalization and risk sharing. Review of Economic Studies, 78, 49-82. Canova, F. (1995). The economics of VAR models. In K. D. Hoover (Ed.) Macroeconometrics: Developments, tensions and prospects, Dordrecht: Kluwer Academic Publishers. Caporin, M., Pelizzon, L., Ravazzolo, F. & Rigobon, R. (2013). Measuring sovereign contagion in Europe. Working Paper 18741, National Bureau of Economic Research. Cheung, Y.-W. & Chinn, M. D. (1997). Further investigation of the uncertain unit root in GNP. Journal of Business and Economic Statistics, 15, 68-73. Chong, Y. Y. & Hendry, D. F. (1990). Econometric evaluation of linear macroeconomic models. Review of Economic Studies, 53, 671-690. Chow, G. C. (1960). Tests of equality between sets of coefficients in two linear regressions. Econometrica, 28, 591-605. Clements, M. P. & Hendry, D. F. (1993). On the limitations of comparing mean square forecast errors. Journal of Forecasting, 12, 617-637. Corsetti, G., Pericoli, M. & Sbracia, M. (2005). 'Some contagion, some interdependence': More pitfalls in tests of financial contagion. Journal of International Money and Finance, 24, 1177-1199. Dieckmann, S. & Plank, T. (2012). Default Risk of advanced economies: An empirical analysis of credit default swaps during the financial crisis. Review of Finance, 16, 902-934. Dolado, J. J., Jenkinson, T. & Sosvilla-Rivero, S. (1990). Cointegration and unit roots. Journal of Economic Surveys, 4, 149-173. Dungey, M., Fry, R., González-Hermosillo, B. & Martin, V. (2006). Contagion in international bond markets during the Russian and the LTCM crises. Journal of Financial Stability, 2, 1–27. Edwards, S. (2000). Contagion. World Economy, 23, 873-900. Eichengreen, B., Rose, A. K. & Wyplosz, C. (1996). Contagious currency crises: First tests. Scandinavian Journal of Economics, 98, 463-484. Ejsing, J. & Lemke, W. (2009). The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-09. Working Paper 1127, European Central Bank. European Central Bank (2012). Global liquidity: Concepts, measurements and implications from a monetary policy perspective. Monthly Bulletin, October, 55-68. Favero, C. & Missale, A. (2012). Sovereign spreads in the Euro Area: Which prospects for a Eurobond? Economic Policy, 27, 231-273. Forbes, K. & Rigobon, R. (2002). No contagion, only interdependence: Measuring stock market comovements. Journal of Finance, 57, 2223-2261. Forbes, K. (2012). The big C: Identifying contagion. Working Paper 18465, National Bureau of Economic Research. Gennaioli, N., Martin, A., & Rossi, S. (2013). Sovereign default, domestic banks and financial institutions. The Journal of Finance, forthcoming. Geweke, J. (1984). Inference and causality in economic time series models. In Z. Girliches & M. D. Intriligator (Eds.) Handbook of econometrics. Amsterdam: Elservier Science Publishers. Gómez-Puig, M. & Sosvilla-Rivero, S. (2013). Granger causality in peripheral EMU debt markets: A dynamic approach. Journal of Banking and Finance, 37, 4627-4649. Gómez-Puig, M. & Sosvilla-Rivero, S. (2014). EMU sovereign debt markets crisis: Fundamental-based or pure contagion? Institut de Recerca en Economia Aplicada (IREA) Working Papers. Universitat de Barcelona. 2014/02. Gorea, D. & Radev, D. (2014). The euro area sovereign debt crisis: Can contagion spread from the periphery to the core? International Review of Economics and Finance, 30, 78-100. Granger, C. W. J. (1969). Investigating causal relations by econometric models and crossspectral methods. Econometrica, 37, 24-36. Granger, C. W. J. & Newbold, P. (1973). Some comments on the evaluation of economic forecasts. Applied Economics, 5, 35-47. Granger, C. W. J. & Newbold, P. (1986). Forecasting economic time series. Academic Press, Orlando, FL. Granger, C.W.J., Huang, W.N. & Yang, C.W. (2000). A bivariate causality between stock prices and exchange rates: Evidence from the recent Asian flu. The Quarterly Review of Economics and Finance, 40, 337-354. Gray, D. (2009). Financial contagion among members of the EU-8: A cointegration and Granger causality approach. International Journal of Emerging Markets, 4, 299-314. Groba, J., Lafuente, J. A. & Serrano, P. (2013). The impact of distressed economies on the EU sovereign market. Journal of Banking and Finance, 37, 2520-2532. Gruppe, M. & Lange, C. (2013). Spain and the European sovereign debt crisis, European Journal of Political Economy (in press). Hansen, B. E. (1997). Approximate asymptotic p values for structural-change tests. Journal of Business and Economic Statistics, 15, 60–67. Hsiao, C. (1981). Autoregressive modelling and money-income causality detection. Journal of Monetary Economics, 7, 85-106. Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in gaussian vector autoregressive models. Econometrica, 59, 1551-1580. Johansen, S. (1994). The role of the constant and linear terms in cointegration analysis of nonstationary variables. Econometric Reviews, 13, 205-229. Johansen, S. (1995). Likelihood-based inference in cointegrated vector autoregressive models. Oxford: Oxford University Press. Kalbaska, A. & Gatkowski, M. (2012). Eurozone sovereign contagion: Evidence from the CDS market (2005–2010). Journal of Economic Behaviour and Organization, 83, 657-673. Kaminsky, G.L. & Reinhart, C. M. (2000). On crises, contagion, and confusion. Journal of International Economics, 51, 145-168. Kwaitkowski, D. Phillips, P.C.B., Schmidt, P. & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54, 159-178. MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11, 601-618. MacKinnon, J. G., Haug, A. A. & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegation. Journal of Applied Econometrics, 14, 563-577. Masson, P. (1999). Contagion, monsoonal effects, spillovers, and jumps between multiple equilibria. In: P.-R. Agenor, M. Miller, D. Vines & A. Weber (Eds.), The Asian financial crisis: Causes, contagion and consequences. Cambridge, UK: Cambridge University Press. Metieu, N. (2012). Sovereign risk contagion in the eurozone. Economics Letters, 117, 35-38. Mody, A. (2009). From Bear Sterns to Anglo Irish: How Eurozone sovereign spreads related to financial sector vulnerability. Working Paper 09/108, International Monetary Fund. Moro, B. (2013). Lessons from the European economic and financial great crisis: A survey, European Journal of Political Economy (in press). Newey, W. K. & Kenneth D. W. (1987). A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, 55, 703-708. Nielsen, B. & Rahbek, A. (2000). Similarity issues in cointegration analysis. Oxford Bulletin of Economics and Statistics, 62, 5-22. Pericoli, M. & Sbracia, M. (2003). A primer on financial contagion. Journal of Economic Surveys, 17, 571-608. Perron, P. (1989). The great crash, the oil price shock and the unit root hypothesis. Econometrica, 57, 1361-1401. Quandt, R. E. (1960). Tests of the hypothesis that a linear regression system obeys two separate regimes. Journal of the American Statistical Association, 55, 324-330. Sander, H. & Kleimeier, S. (2003). Contagion and causality: An empirical investigation of four Asian crisis episodes. International Financial Markets, Institutions and Money, 13, 171-186. Syllignakis, M. N, & Kouretas, G. P. (2011). Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets. International Review of Economics and Finance, 20, 717-732. Thornton, D. L. & Batten, D. S. (1985). Lag-length selection and tests of Granger causality between money and income. Journal of Money, Credit, and Banking, 27, 164-178. Williams, E. J. (1959). Regression analysis. New York: Wiley. Zivot, E. & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10, 251-270.