On the Identification of Interdependence and Contagion of Financial Crises

In this paper we propose a new framework for modeling heteroskedastic structural vector autoregressions. Although it is general enough to find potential applications in many empirical economic fields, it reveals to be well suited in the distinction between interdependence and contagion in the literature related to the transmission of financial crises. The identification of the structural parameters is obtained by exploiting the heteroskedasticity in the data, naturally arising during crisis periods. More precisely we provide identification conditions when both heteroskedasticity and traditional restrictions on the parameters are jointly considered. Finally, this methodology is used to investigate the relationships between sovereign bond yields for some highly indebted EU countries.