TY - JOUR

T1 - The walking debt crisis

AU - Wegener, Christoph

AU - Kruse, Robinson

AU - Basse, Tobias

N1 - Publisher Copyright: © 2017 Elsevier B.V.

PY - 2019/1/1

Y1 - 2019/1/1

N2 - 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.

AB - 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.

KW - Economics

KW - Covereign debt crisis

KW - Sovereign credit risk

KW - Subprime crisis

KW - Bubbles

KW - explosive behavior

KW - Bubble migration

UR - http://www.scopus.com/inward/record.url?scp=85035093933&partnerID=8YFLogxK

U2 - 10.1016/j.jebo.2017.10.008

DO - 10.1016/j.jebo.2017.10.008

M3 - Journal articles

VL - 157

SP - 382

EP - 402

JO - Journal of Economic Behavior and Organization

JF - Journal of Economic Behavior and Organization

SN - 0167-2681

ER -