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

Petmezas, Dimitris; Santamaria, Daniel

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


Authors

Daniel Santamaria



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.

Citation

Petmezas, D., & 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, 401-424. https://doi.org/10.1016/j.jimonfin.2014.06.005

Journal Article Type Article
Acceptance Date Jun 21, 2014
Online Publication Date Jul 5, 2014
Publication Date 2014-12
Deposit Date Jul 29, 2020
Publicly Available Date Nov 5, 2020
Journal Journal of International Money and Finance
Print ISSN 0261-5606
Electronic ISSN 1873-0639
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 49
Pages 401-424
DOI https://doi.org/10.1016/j.jimonfin.2014.06.005
Public URL https://durham-repository.worktribe.com/output/1259493
Related Public URLs https://epubs.surrey.ac.uk/820734/

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