Abstract
The crisis in the eurozone periphery has so far affected markets substantially more than the size of the countries in the region would suggest. Data on direct exposures and simple correlations also fail to explain the cross-border impact of the crisis. Following Segoviano (2006), this paper uses distress dependence analysis to measure market assessment of contagion risks from Greece and Ireland to the rest of Europe during the peaks of the crises in these countries. The results provide insights to possible contagion risks through cross-border negative feedback loops between sovereigns and banking sectors in Europe that help explain the severe impact of the crisis.
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