Putting the 'C' to Crisis: Contagion, Correlations and Copulas on EMU Bond Markets

Abstract

We investigate the contagion appetite generated by the current debt crisis in Greece by focusing on six European Monetary Union bond markets, namely the Netherlands, Germany, Italy, Spain, Portugal and France. We use a framework that contains two procedures, a spillover regime/switching model and a time-varying copula model. The empirical evidence confirms contagion appetite to European Monetary Union countries, which are prone to contagion, some because of their excessive macroeconomic imbalances and others because of the sovereign's risk perception and the arbitrage appetites of international bond portfolios; but not an overall contagion effect from the crisis country to all others.