Contagion in sovereign debt and commodities markets

Sanya, Oluwasijibomi Oluwagbemiga (2022) Contagion in sovereign debt and commodities markets. PhD thesis, Birkbeck, University of London.

Abstract

This thesis introduces the notions of good contagion, bad contagion and reverse contagion. It focuses on addressing five research questions relating to the empirical literature on contagion, the 2010 EMU sovereign debt crisis, and the commodities markets crisis of 2008.The first research question asks whether contagion is only associated with extreme negative events i.e. bad contagion. Using non-linear simultaneous equations, this thesis shows that both bad and good contagion (associated with extreme positive shocks beyond what fundamentals can explain) occurred in the EMU sovereign debt crisis. The second research question probes the EMU sovereign debt crisis of 2010 to ascertain whether Greece is the only source of the crisis. Non-linear simultaneous equations are used to investigate, with all periphery markets acting as potential crisis source countries. Greece is found not to be the only source of contagion, Ireland and Portugal also acted as sources. The third research question queries whether contagion effects resulting from extreme negative shocks can be propagated as extreme positive shocks and vice versa. Non-linear simultaneous equations are applied to the 2008 commodities crisis. From the results, reverse contagion is captured i.e crisis triggered flight to quality effects captured through counter intuitive but statistically significant contagion indicators which fundamentals cannot explain. The fourth research question requests insight on the tail event patterns of vulnerability to contagion within the exchange traded commodities complex. This thesis applies non-linear simultaneous equations to the 2008 commodities crisis. Industrial metals and energy markets are found to be the most systemically important sources of contagion. The fifth research question requests insight on the patterns of contagion vulnerability to commodities markets from conventional financial markets. This thesis uses a coexeedance approach to explore commodities markets. Results indicate that energy markets are the most vulnerable to bad contagion from conventional financial markets.

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