Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154218
Authors: 
De Santis, Roberto A.
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1785
Abstract: 
Euro redenomination risk is the risk that a euro asset will be redenominated into a devalued legacy currency. We propose a time-varying, country-specific market perception of intra-euro area redenomination risk measure, defined as the quanto CDS of a member country relative to the quanto CDS of a benchmark member country. Focusing on Italy, Spain and France and using Germany as benchmark, we show that the redenomination risk shocks, defined as the unexplained component of the market perception of redenomination risk orthogonal to exchange rate, global, regional and liquidity risks, significantly affect sovereign yield spreads, with Italy and Spain being the countries most adversely affected, followed by France. Finally, foreign redenomination risk shocks spill over and above local redenomination risk shocks, corroborating the fact that this risk is systemic.
Subjects: 
euro
redenomination risk
sovereign credit spreads
systemic risk
JEL: 
C32
F36
G12
G15
ISBN: 
978-92-899-1598-4
Document Type: 
Working Paper

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