Official URL: https://doi.org/10.1080/1351847X.2021.1910056

We analyse the stability of the cross-market shock transmission mechanism betweenbanks and sovereign bonds during the Eurozone sovereign debt crisis for crisis-hitperiphery countries and Germany. We also examine the shock propagation of bankingshocks and sovereign bond shocks between domestic and external markets. Using aMarkov-switching framework, we find strong evidence of bilateral contagion betweenbanks and sovereign bonds and also between domestic and external banking sectors.Sovereign bond markets are different. An external shock only produces contagiouseffects in Greece, who were largely dependent on external aid. For all the others, exter-nal shocks lead to decoupling as investors became increasingly discerning in theirperception of the debt instruments issued by different Eurozone states.