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The EMU sovereign-debt crisis: Fundamentals, expectations and contagion

Authors
Journal
Journal of International Financial Markets Institutions and Money
1042-4431
Publisher
Elsevier
Volume
22
Issue
4
Identifiers
DOI: 10.1016/j.intfin.2012.03.003
Keywords
  • Euro Area
  • Crisis
  • Spreads
  • Fundamentals
  • Expectations
  • Contagion

Abstract

Abstract We offer a detailed empirical investigation of the EMU sovereign-debt crisis. We find a marked shift in market pricing behaviour from a ‘convergence-trade’ model before August 2007 to one driven by macro-fundamentals and international risk thereafter. We find evidence of contagion effects, particularly among EMU periphery countries. The EMU debt crisis is divided into an early and current crisis period. Unlike the former where contagion was mainly originating from Greece, the latter involves multiple sources of contagion. Finally, the escalation of the Greek debt crisis since November 2009 is due to an unfavourable shift in country-specific market expectations.

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