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

Daniel Santamaria, Dimitris Petmezas

Research output: Contribution to journalArticle

12 Citations (Scopus)
16 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)401-424
Number of pages24
JournalJournal of International Money and Finance
Volume49
Issue numberPart B
Early online date5 Jul 2014
DOIs
Publication statusPublished - Dec 2014

Fingerprint

Contagion
Sovereign debt crises
Investors
Portfolio rebalancing
Wealth effect
Banking
Liquidity
Debt crisis
Credit spreads
Wealth
Risk aversion
Testing
European countries

Keywords

  • Contagion
  • Wealth effect
  • Portfolio rebalancing
  • Banking crisis
  • Sovereign debt crisis
  • Stock-bond relationships

Cite this

@article{033e831614d64ac79ffe6d5fe5ba3cf8,
title = "Investor induced contagion during the banking and European sovereign debt crisis of 2007-2012:: wealth effect or portfolio rebalancing?",
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.",
keywords = "Contagion, Wealth effect, Portfolio rebalancing, Banking crisis, Sovereign debt crisis, Stock-bond relationships",
author = "Daniel Santamaria and Dimitris Petmezas",
year = "2014",
month = "12",
doi = "10.1016/j.jimonfin.2014.06.005",
language = "English",
volume = "49",
pages = "401--424",
journal = "Journal of International Money and Finance",
number = "Part B",

}

TY - JOUR

T1 - Investor induced contagion during the banking and European sovereign debt crisis of 2007-2012:

T2 - wealth effect or portfolio rebalancing?

AU - Santamaria, Daniel

AU - Petmezas, Dimitris

PY - 2014/12

Y1 - 2014/12

N2 - 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.

AB - 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.

KW - Contagion

KW - Wealth effect

KW - Portfolio rebalancing

KW - Banking crisis

KW - Sovereign debt crisis

KW - Stock-bond relationships

U2 - 10.1016/j.jimonfin.2014.06.005

DO - 10.1016/j.jimonfin.2014.06.005

M3 - Article

VL - 49

SP - 401

EP - 424

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

IS - Part B

ER -