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Redenomination-risk spillovers in the Eurozone

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  • Borri, Nicola

Abstract

In this paper we use sovereign quanto-CDS spreads as proxy for redenomination-risk in the Eurozone, i.e., the risk of a sovereign default obtained by the redenomination of debt in a different currency. Quanto-CDS spreads are the difference between the CDS quotes in U.S. dollars and euros. We capture spillovers with ΔCoVaR, a risk-indicator proposed by Adrian and Brunnermeier (2016), that measures the difference between the value-at-risk of country i conditional on a state of distress in country j and the median state. Our sample starts on the onset of the Great Recession. We find that Belgium, Ireland, Italy and Spain are the only Eurozone countries exposed to redenomination-risk spillovers. However, in the shorter post-OMT sample, the only vulnerable countries are Italy and Spain.

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  • Borri, Nicola, 2019. "Redenomination-risk spillovers in the Eurozone," Economics Letters, Elsevier, vol. 174(C), pages 173-178.
    • Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:173-178
    DOI: 10.1016/j.econlet.2018.11.013
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    Cited by:

    1. Kiss, Gábor Dávid & Alipanah, Sabri, 2024. "Sovereign spread divergence owing to inflation and redenomination risk countered by unconventional monetary policy in the Eurozone," Economic Modelling, Elsevier, vol. 131(C).
    2. Bondatti, Massimiliano & Rillo, Giovanni, 2022. "Commodity tail-risk and exchange rates," Finance Research Letters, Elsevier, vol. 47(PA).
    3. Bonaccolto, Giovanni & Borri, Nicola & Consiglio, Andrea, 2023. "Breakup and default risks in the great lockdown," Journal of Banking & Finance, Elsevier, vol. 147(C).
    4. Andrieș, Alin Marius & Ongena, Steven & Sprincean, Nicu, 2021. "The COVID-19 Pandemic and Sovereign Bond Risk," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    5. Zhao, Hong & Li, Jiayi & Lei, Yiqing & Zhou, Mingming, 2022. "Risk spillover of banking across regions: Evidence from the belt and road countries," Emerging Markets Review, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Redenomination risk; Credit default swap; Quanto-CDS;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F3 - International Economics - - International Finance
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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