Sovereign Bond Crisis: Fundamental Contagion

Abstract

The aim of this research is to detect which are the main common determinants of the euro-area government bond spreads, in order to study the principal contagion channels of the European sovereign debt crisis. The analysis has been conducted through a simple VAR model which is considered to be one of the best methods to proxy the economy’s behavior. The countries that have been studied are France, Germany, Italy and Spain during a sample period that goes from January 2003 to December 2012. Sovereign bonds differentials have been put into relation with a set of financial and macroeconomic variables, which in turn have been chosen in order to capture the fundamental credit risk, the liquidity risk and lastly the international risk aversion. Finally it has been analyzed the role of the ECB in the context of the sovereign debt crisis.