Contagion during the Greek Crisis
One of the hot words last year we learnt of was Contagion. Many have used it to describe the possible spill over effects from the Greek mess, but few have actually studied the “real” implications and effects on stock and bond prices. Time for some empirical research, by Mink and Haan;
Using an event study approach, we examine the impact of news about Greece and news about a Greek bailout on bank stock prices in 2010 using data for48 European banks. We ﬁrst identify the twenty days with extreme returnson Greek sovereign bonds and categorize the news events during those daysinto news about Greece and news about the prospects of a Greek bailout. Our ﬁndings suggest that only news about the Greek bailout has a significant eﬀect on bank stock prices, even on stock prices of banks withoutany exposure to Greece or other highly indebted euro area countries. News about the economic situation in Greece does not lead to abnormal returns in bank stock prices.
Our ﬁnding that news about Greece does not havean impact on bank stock prices while news about a bailout does even forbanks without any exposure to Greece or other highly indebted countries, suggests that markets consider news about the bailout as a signal of European governments’ willingness in general to use public funds to combat the ﬁnancial crisis. In contrast, the price of sovereign debt of Portugal, Ireland, and Spain, responds to both news about the economic situation of Greeceand news about a Greek bailout. A plausible explanation for the impactof news about Greece on the bond prices of other countries is that thereis a ‘wake-up call’: a crisis initially restricted to one country may providenew information prompting investors to reassess the vulnerability of othercountries, which spreads the crisis across borders. (Full paper here).