Identifying and measuring the contagion channels at work in the European financial crises

We investigate the phenomenon of contagion with a special focus on the recent financial crisis, distinguishing four alternative channels, namely the flight-to-quality, flight-to-liquidity, risk premium, and correlated information channels. Specifically, we employ the differences among estimates and impulse response functions across linear and nonlinear models to identify and measure cross-asset contagion. An application to weekly Eurozone data for a 2007-2014 sample reveals that a two-state Markov switching model shows economically weak, though accurately estimated, contagion effects in a crisis regime. These findings are mainly explained by a flight-to-quality channel. Furthermore, we extend our analysis to explore whether European markets may or may not have been subject to contagion when exposed to external shocks, such as those originated from the US subprime crisis.