Why is contagion asymmetric during the European sovereign crisis?

We use shocks to CDS spreads of peripheral countries to identify the effects of changes in the creditworthiness of these countries on stock returns of EU banks. We predict that large positive spread shocks should have a weaker impact in absolute value than large negative shocks because bank equity is an option on the bank's assets, policy reactions are asymmetric, and bank portfolios include bonds that benefit from a flight to safety. We find support for this prediction during the European crisis, so that contagion from pervasive creditworthiness shocks is asymmetric. This effect is important enough to make the portfolio contagion channel economically and statistically insignificant for adverse shocks.