Sovereign Contagion Effect on Eurozone Debt Crisis

[[abstract]]European sovereign debt holders are deeply worried about the excessive national debt refinancing problem in the first quarter of 2010, especially when the Greece was downgrade by Standard and Poors on April, 2010. This paper adopts the extreme value theory (EVT) and single-factor Gaussian copula function to capture the tail distribution of stock returns as well as the tail dependency, and provides the evidences on the cross-country and cross-regional contagion effect on the Eurozone sovereign debt crisis. The empirical results illustrate that regional absolute contagion is higher in the developed region, and lower in the frontier region. In the meanwhile, Italy distressed induces highest contagious probability, while Ireland distressed cause highest decrease of contagious probability. The fundamental-based contagion is evidenced around the period of Eurozone debt crisis, the degree of co-crash effect on Eurozone debt crisis depends on the geographical, political, and trading dependences between countries. By analyzing the determinants of the sovereign distressed probability, our result reveals that the sovereign debt holders should be highly concerned about the variation of the debt or expenditure indicators of the refinancing country since the sovereign credit risk is highly sensitive to those indicators