European government bond market contagion in turbulent times

Abstract

In this paper we investigate the dynamics of European government bond market contagion during the financial crisis and, subsequently, during the European sovereign debt crisis. Following Bae et al. (2003), we use the coexceedance variable joint occurrences of extreme negative and positive returns in different countries on a given day to measure contagion. We also analyze the underlying determinants of the dynamics of contagion using an ordered logistic regression. Our results reveal that interest rates, stock market returns and market volatility help explain contagion in European government bond markets; however, their individual relevance varies from crisis to crisis. We also find that past contagion significantly increases the probability of more episodes of contagion today. Finally, we find statistically significant evidence of contagion from the "old" European Monetary Union (EMU) members to the new members during the sovereign debt crisis and to the non-EMU EU-15 members during both crises. Interestingly, our results show that the new members are those that behave most differently in our analysis.