Contagious speculative bubbles: a note on the Greek sovereign debt crisis

The Greek sovereign debt crisis of 2009/2010 fostered widespread fears of contagion. We analyzed the danger of contagion by studying to which extent news to speculative bubbles in the Greek equity market spread to the equity markets of Portugal, Ireland, Italy, and Spain. To this end, we estimated a version of the present-discounted value model of equity valuation extended to include a rational stochastic speculative bubble. We then studied cross-country causal links between news to speculative bubbles. We found evidence of causality from Greece to the other countries, but no strong evidence of reversed causality. This finding implies that, as far as equity markets are concerned, movements in speculative bubbles in the Greek equity market may in fact have the potential to spread in a contagious way to the other European countries in our sample.