Flight-to-quality and contagion in the european sovereign debt crisis: the cases of Portugal and Greece

Abstract

This work aims to analyze the co-movements between the Portuguese, Greek, Irish and German government bond markets after the subprime crisis (2007 to 2013). Additionally, it aims to test the existence of contagion between the Portuguese, Greece and Irish bond markets, and to explore the phenomenon of flight-to-quality from the Portuguese and Greek bond markets to the German market. The analysis is undertaken using a DCC-IGARCH model with daily data for the 10 year yields government bonds. Results suggest the existence of contagion between the Greek and the Portuguese markets, and to a lesser extent between the Irish and the Portuguese markets. The correlation between the Portuguese and Greek yields at the end of the analyzed period indicates the non-existence of decoupling between the two countries. During most of the identified crisis periods, flight-to-quality flows are evident from the Portuguese and Greek bond markets to the German market.