Abstract:This paper demonstrates that the Eurozone sovereign debt crisis constitutes a special case in the contagion literature with general implications. Perfectly correlated bond markets imply that contagion can only occur if there is a decoupling to lower correlation levels with increased idiosyncratic shocks leading to more severe but less systemic spillovers. This theoretical prediction is fully supported by the empirical analysis. We also show that dynamic coexceedance estimates provide a more robust and more gen… Show more
“…These results are in line with Baur (2018) who found evidence of partially disintegrated Euro area bond markets during the debt crisis period, which is also seen as a necessary condition for strong contagion effects.…”
Section: Robustness Checks and Country Groupssupporting
This paper uses learning methods and optimization techniques to investigate the determinants of shock propagation in the Euro area for the period 2001–2015. First, principal component analyses are used with country bond yields to identify sub-periods and country groups; second, influencing factors for country bond yields are investigated with random forest models; lastly, shock propagation among groups are examined with impulse response functions. Models in steps two and three are improved by using simulated annealing algorithm. The empirical findings achieved can be particularly relevant for both investors and policymakers. Shedding light on the determinants of financial contagion may be in fact useful for investors who can derive relevant information about countries which are less sensitive to be affected by shocks, orienting thus their investment strategies. At the same time, policymakers could draw worthwhile and preventive hedging strategies and design the most suitable crisis management policies.
“…These results are in line with Baur (2018) who found evidence of partially disintegrated Euro area bond markets during the debt crisis period, which is also seen as a necessary condition for strong contagion effects.…”
Section: Robustness Checks and Country Groupssupporting
This paper uses learning methods and optimization techniques to investigate the determinants of shock propagation in the Euro area for the period 2001–2015. First, principal component analyses are used with country bond yields to identify sub-periods and country groups; second, influencing factors for country bond yields are investigated with random forest models; lastly, shock propagation among groups are examined with impulse response functions. Models in steps two and three are improved by using simulated annealing algorithm. The empirical findings achieved can be particularly relevant for both investors and policymakers. Shedding light on the determinants of financial contagion may be in fact useful for investors who can derive relevant information about countries which are less sensitive to be affected by shocks, orienting thus their investment strategies. At the same time, policymakers could draw worthwhile and preventive hedging strategies and design the most suitable crisis management policies.
“…By solely considering the most positive correlations, we include the formation of cliques between countries, which is prevalent within the western European group of 6 nodes. This level of disintegration which is observed during COVID-19 is supported by previous studies of the 2012 Euro zone debt crisis [57] . Fig.…”
In this work, we investigate the impact of the COVID-19 pandemic on sovereign bond yields. We consider the temporal changes from financial correlations using network filtering methods. These methods consider a subset of links within the correlation matrix, which gives rise to a network structure. We use sovereign bond yield data from 17 European countries between the 2010 and 2020 period. We find the mean correlation to decrease across all filtering methods during the COVID-19 period. We also observe a distinctive trend between filtering methods under multiple network centrality measures. We then relate the significance of economic and health variables towards filtered networks within the COVID-19 period. Under an exponential random graph model, we are able to identify key relations between economic groups across different filtering methods.
“…3 However, there can exist an inverse relationship between integration and contagion. A different interpretation is provided by Baur (2020) who finds that full integration minimizes the strength of contagion as financial shocks are diversified and shared among countries. On the other extreme, when markets are fully segmented the potential magnitude of contagion is maximized and financial shocks are not shared among countries.…”
Using high-frequency data from the MTS trading platform, we examine return and volatility spillover effects across different maturities in the European sovereign bond market over tranquil and crisis periods. The longer-term benchmark securities of core countries are the largest net volatility transmitters, whereas the shorter-term benchmarks of periphery countries are the leading net receivers of volatility shocks. Moreover, the short-end and the long-end of the yield curve in both regions emerge as the sole net recipients of return spillovers. We note that bonds of periphery countries become volatility spillover transmitters during important macroeconomic events such as credit rating downgrades and financial assistance packages to financially distressed countries.
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