Contagion during the Greek sovereign debt crisis

We examine the impact of news about Greece and news about a Greek bailout on bank stock prices in 2010 using data for 48 European banks. We identify the twenty days with extreme returns on Greek sovereign bonds and categorise the news events during those days into news about Greece and news about the prospects of a Greek bailout. We find that, except for Greek banks, news about Greece does not lead to abnormal returns while news about a bailout does, even for banks without any exposure to Greece or other highly indebted euro countries. This finding suggests that markets consider news about the bailout to be a signal of European governments' willingness in general to use public funds to combat the financial crisis. Sovereign bond prices of Portugal, Ireland, and Spain respond to both news about Greece and news about a Greek bailout.(C) 2012 Elsevier Ltd. All rights reserved.