The walking debt crisis

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  • Christoph Wegener, Ctr Risk & Insurance
  • ,
  • Robinson Kruse
  • Tobias Basse, Norddeutsche Landesbank Girozent, Touro Coll Berlin

This article sheds light on the question whether arising sovereign credit risk in the EMU has been triggered by the US subprime crunch. By adapting recent econometric methodologies suggested in the related field of speculative bubbles, we find clear evidence for fast diverging (and even explosive) behavior of EMU government bond yields of peripheral countries relative to Germany during the financial and the European debt crisis. This might be caused by flight-to-quality effects to German government bonds coincident with the collapse of Lehman Brothers and by a loss of confidence in the fiscal stability of Greece, Ireland, Italy, Portugal and Spain during the European debt crisis. First, we find compelling evidence for bubbles in the Dow Jones Equity Real Estate Investment Trusts (REITs) index which serves as a weekly measure of economic activity in the North American real estate sector. Second, in our main analysis, we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes. Our findings indicate that this was the case in the course of the financial crisis, but not during the EMU sovereign debt crisis. These results suggest that the severe fiscal problems in peripheral countries are homemade rather than imported from the US. (C) 2017 Elsevier B.V. All rights reserved.

Original languageEnglish
JournalJournal of Economic Behavior & Organization
Pages (from-to)382-402
Number of pages21
Publication statusPublished - 2019
Event20th Annual Workshop on the Economic Science with Heterogeneous Interacting Agents (WEHIA) - , France
Duration: 21 May 201523 May 2015


Conference20th Annual Workshop on the Economic Science with Heterogeneous Interacting Agents (WEHIA)

    Research areas

  • Sovereign debt crisis, Sovereign credit risk, Subprime crisis, Bubbles, Explosive behavior, Bubble migration, INTEREST-RATE CONVERGENCE, UP-CALL CONTAGION, EXPLOSIVE BUBBLES, FINANCIAL CRISIS, LIMIT THEORY, SOVEREIGN, STOCK, RISK, IMBALANCES, EXUBERANCE

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