Financial illness and political virus: the case of contagious crises in the Eurozone

Abstract

This paper investigates the volatility spillover effects from the southern to northern part of the Eurozone during the sovereign debt crisis. Focusing on different phases of the crises, we propose using the dynamic conditional correlation model and the BEKK model to identify possible linkages during the period of 2005–2015. The findings showed that both models behave satisfactorily and are flexible in presenting spillover effects. However, regarding conditional correlations, the asymmetric dynamic conditional correlation model seems to fit better. Additionally, Spain and Italy can significantly damage all strong northern economies, while Greece’s negative shocks are capable of co-moving the French index. Finally, France is the most correlated country within the southern Eurozone.

Keywords:

• Dynamic conditional correlations
• asymmetric BEKK
• Eurozone debt crisis
• spillover effects

JEL classification:

• G01
• G02
• G15

Notes

1. In the early Eurozone period, correlations for both models have similar behavior. However, there is a continuous negative correlation between Cyprus and Austria, which is quite unusual compared to the ADCC where all correlations vary near 0.20. Figures with correlations R(t) for both models ADCC and ABEKK, are available from the authors upon request.