Is Contagion Infecting Your Portfolio? A Study of the Euro Sovereign Debt Crisis

Abstract

For the euro debt crisis, we assess the relevance of financial contagion from an investor perspective. We find that contagion, which we identify through the joint occurrence of extremely negative bond returns, has only small and transitory effects on broad government bond portfolios. For portfolios with concentrated country exposures, the frequency of contagious events does not add information to a standard analysis of risk. Hence, contagion in the euro debt crisis appears to bear little relevance for market timing and country selection alike.