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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 10 de 2012

  

Financial Crisis and Domino Effect


Pedro Bação

Faculty of Economics, University of Coimbra and GEMF

João Maia Domingues
Faculty of Economics, University of Coimbra

António Portugal Duarte
Faculty of Economics, University of Coimbra and GEMF

Abstract:
This paper analyses the spread of the sovereign debt crisis in the Eurozone. To this end we employ three approaches. The first approach employs univariate autoregressive models. These allow the identification of shocks to government bond yields in Portugal, Italy, Ireland, Greece, Spain and Germany. The timing of the shocks is then analysed in search for evidence of a domino effect. The second approach applies the same identification procedure to VAR models estimated for each country. Finally, the third approach computes Granger causality tests between government bond yields in those countries. The results from the first two approaches do not appear to favor the contagion hypothesis. Nevertheless, the third approach, when bivariate VAR models are used, suggests that there may be interdependence between Greece, Ireland and Portugal, which might have justified European intervention to stop the crisis from spreading.

JEL Classification: F36, E21, F32.

Keywords:
Contagion; Financial Crisis; Granger Causality; Identification of Shocks; Sovereign Debt Crisis.

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