I examine the evolution of contagion indexes between the European financial
sector and the sovereign sector (Austria, Belgium, France, Germany, Italy,
Netherlands and Spain) during the European sovereign credit crisis.
Contagion indexes, Delta CoVaR and Delta CoES, reflect events associated
with extreme left tail returns and interdependencies between defaults
different than those observed in tranquil times. These measures reveal very
useful information concerning risk management. I use a copula approach
with time-varying parameters to capture changes in the tail dependence
between returns in the financial and the sovereign sectors. I employ a
Switching Markov model to identify the most stressful moments of the
contagion indicators. The results point out the emergence of Greek debt
crisis on March 2010 and the vulnerable situation of Spain and Italy in
summer 2011 as the main periods where the contagion from the sovereign to
the financial sector was stronger. The decrease in contagion was gradual
since the speech made by the ECB on July 26th, 2012. The statistical
significance of the change in the contagion indicators is checked using
boostrap tests.