Measuring bilateral spillover and testing contagion on sovereign bond markets in Europe

•We measure strength and direction of bilateral spillover across EU bond markets.•There is substantial spillover between EMU countries, especially since the financial crisis.•We provide a novel test for contagion by applying the multivariate structural break test.•Contagion is not a widespread phenomenon on EU bond markets.•Strong co-movement is due to stronger shocks under an otherwise similar propagation mechanism. The global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries, with Belgium, Italy and Spain being key markets during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion.