Measuring sovereign risk contagion in the Eurozone

This paper proposes new measures of financial contagion, as observed during the recent Eurozone sovereign debt crisis. The new measures, referred to as contagion Value-at-Risk and contagion Expected Shortfall, are based on popular risk exposure measures and therefore can provide useful practical information for investors. For this purpose, we construct a new model that disentangles contagion from interdependence. We find that contagion effects fluctuate dynamically, sometimes greatly deviating from mean levels. In addition, the economic value of contagion proves to be quite large, even in stable economies.