Sovereign risk contagion in the Eurozone

This paper extends the canonical model of contagion proposed by Pesaran and Pick [Pesaran, M.H., Pick, A., 2007. Econometric issues in the analysis of contagion. Journal of Economic Dynamics and Control 31, 1245-1277] in order to test for contagion of credit events in Euro area sovereign bond markets. We find evidence for significant contagion effects among long-term bond yield premia between 1, January 2008 and 1, February 2012.

► We test for contagion in Euro area sovereign bond markets. ► We propose two extensions to the canonical econometric model of contagion. ► We propose a credit event indicator derived from value-at-risk. ► The market's risk appetite is an important determinant of sovereign risk. ► Contagion effects among EMU member states are significant.