Flight-to-quality and contagion in the European sovereign debt crisis: The cases of Portugal and Greece
Journal of Financial Economic Policy
ISSN: 1757-6385
Article publication date: 30 January 2019
Issue publication date: 3 May 2019
Abstract
Purpose
The purpose of this paper is to analyze the co-movements between the Portuguese, Greek, Irish and German government bond markets after the subprime crisis (2007 to 2013), with a special focus on the European sovereign debt crisis. It aims to assess the existence of contagion between the Portuguese, Greece and Irish bond markets and to explore the phenomenon of flight-to-quality from the Portuguese and Greek bond markets to the German market.
Design/methodology/approach
The analysis is undertaken using a DCC-GARCH model with daily data for 10-year yield government bonds. The change in correlation from the stable periods to the crisis periods is used to identify contagion or flight-to-quality.
Findings
Results suggest that there was contagion between the Greek and Portuguese markets, and to a lesser extent between the Irish and Portuguese markets. During most of the identified crisis periods, there are evident flight-to-quality flows from the Portuguese and Greek bond markets to the German market.
Originality/value
This paper contributes to the literature by applying the methodology DCC-GARCH to several crisis episodes for the analysis of contagion and flight-to-quality during the European sovereign debt crisis.
Keywords
Acknowledgements
The authors of this article have not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the Banco de Portugal.
Citation
Pereira, I.P. and Lagoa, S. (2019), "Flight-to-quality and contagion in the European sovereign debt crisis: The cases of Portugal and Greece", Journal of Financial Economic Policy, Vol. 11 No. 2, pp. 193-217. https://doi.org/10.1108/JFEP-03-2018-0048
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited