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Eurozone debt crisis; Contagion; Sovereign bond yields; Stock returns; Risk-on risk-off hypothesis; Decoupling hypothesis
This paper examines the contagion of the eurozone debt crisis to developed and emerging stock markets around the world. Using the VAR methodology, and changes in sovereign bond yields and stock returns of the crisis countries as proxies for the eurozone debt crisis, this paper finds strong and pervasive evidence of negative contagion from the crisis countries to other stock markets. Consistent with risk-on risk-off hypothesis, changes in sovereign bond yields of crisis countries impact stock returns positively during normal times and negatively during the crisis, providing strong evidence of negative contagion. The impact of equity returns of crisis countries on other equity markets is large and positive during normal times and less positive during the crisis, suggesting evidence of negative contagion and decoupling of stock markets during the crisis. The Asian markets do not show pervasive evidence of contagion from the eurozone crisis.
Journal of International Financial Markets, Institutions and Money