We develop a novel approach to investigate the presence of financial contagion during the European sovereign debt crisis. The novelty lies in modelling bond yield market comovements allowing the individual long-run variances to be time-dependent and the correlations to change smoothly between two extreme states according to time and observable financial variables. The new model has the flexibility to discern between long-run and short-run contagion effects on the basis of the variable used as indicator for the time-variation in correlations. The main results provide evidence of long-run contagion effects across peripheral countries following the more acute phase of the sovereign crisis.
Campos-Martins, S. and Amado, C. (2023) 'Financial market linkages and the sovereign debt crisis', Journal of International Money and Finance