The crisis in the Eurozone between 2009 and 2015 provides an opportunity to test whether financial markets fully display the characteristics associated with the efficient market hypothesis or whether behavioral approaches which focus on excessive pessimism and confirmation bias also offer insights into the performance of markets. In this paper we test several important aspects of market behavior. Specifically we examine the extent to which large changes in risk premia amongst the countries that encountered crises were related to news. We also investigate whether the impact of good and bad news was symmetrical. Finally we explore whether changes in risk premia in Greece affected risk premia in other countries in an asymmetrical and biased way. We discover that while there is considerable evidence that financial markets often performed in an efficient way during the crisis, there are also important departures from this pattern that are consistent with the behavioral approach. Our findings imply that both the efficient and behavioral approaches are helpful when trying to understand how markets perform.

Over the period between end‐2009 and end‐2015, Greece experienced two discernible financial crises. This paper undertakes a correlation analysis of risk premia to investigate the nature and extent of contagion from these crises to other selected Eurozone countries. A commonly expressed view is that the effects of the second crisis were more muted since the systemic risks were seen by markets as being lower. However, using a rolling correlation model, a Dynamic Conditional Correlation GARCH (DCC‐GARCH) model and a t‐copula model we find that this is not the case. Broadly speaking, the contagion effects of the second crisis were at least as large as those associated with the first one.

The prevalence of contagion between the Euro-zone countries and other European countries since the Greek crisis of 2009 is now well-known, but the factors that influence the pattern of this contagion are not well understood. We investigate this question both within Europe and beyond to the USA and Japan, using an asymmetric M-GARCH model that focuses on extreme values of the risk premia on government bonds. We compare these extreme values with news of major events and find that they are highly correlated. We find a different pattern of contagion emanating from Ireland compared to the other crisis countries of Greece, Italy, Portugal and Spain. We also examine the factors that have made countries vulnerable to contagion and find that financial factors are more important than trade ones. However, intra-Euro-zone trade has also been a significant factor between the major Euro-zone economies. There is little evidence that global factors affect contagion between EU member states, but some evidence that nominal exchange rate movements offer a degree of insulation from contagion for the non-Euro zone states.

While there have been many studies that examine contagion within the Euro-zone, this paper investigates the potential contagion from changes in the Greek sovereign risk premium over 2009-2016, as measured by the yield on 10 year government bonds, to six European countries outside of the Eurozone all of which operated a managed float against the Euro. We find evidence of contagion to potential Euro-zone ascendants (Czech Republic, Hungary and Poland), but 'flight to safety' (or safe haven) effects for the United Kingdom, Sweden and Switzerland.

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