Investor induced contagion during the banking and European sovereign debt crisis of 2007-2012: wealth effect or portfolio rebalancing?

Petmezas, D. and Santamaria, D. (2014) Investor induced contagion during the banking and European sovereign debt crisis of 2007-2012: wealth effect or portfolio rebalancing? Journal of International Money and Finance, 49 (Part B). pp. 401-424. ISSN 0261-5606.

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Abstract

This study investigates the way a crisis spreads within a country and across borders by testing the investor induced contagion hypothesis through the liquidity channel on stock-bond relationships of the US and five European countries before and during the global banking and European sovereign debt crisis of 2007-2012. We provide evidence consistent with the wealth effect as a source of contagion for the majority of countries. Nevertheless, we uncover evidence of investor induced contagion sourced by the portfolio rebalancing effect for correlations involving Spanish and Italian bonds during the debt crisis. Further, we find that tight (narrow) credit spreads reduce (magnify) the wealth and portfolio rebalancing effects, which are offset by the opposite effects of risk aversion amongst investors, a dynamic that is not restricted to crisis periods.

Item Type: Article
Uncontrolled Keywords: Contagion; Wealth effect; Portfolio rebalancing; Banking crisis; Sovereign debt crisis; Stock-bond relationships
Subjects: H Social Sciences > HG Finance
Divisions: pre Nov-2014 > Faculty of Business and Management > Department of Accounting, Finance & Information Management
Depositing User: Dr Daniel Santamaria
Date Deposited: 28 Nov 2014 14:40
Last Modified: 25 Jan 2016 17:18
URI: https://create.canterbury.ac.uk/id/eprint/12927

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Last edited: 29/06/2016 12:23:00