Crash Risk of the Euro in the Sovereign Debt Crisis of 2009-2010

Abstract:     
The economic-political instability of a country, which is tied to its credit risk, often leads to sharp depreciation and heightened volatility in its currency. This paper shows that not only the creditworthiness of the euro-area countries with weaker fiscal positions but also that of the member countries with more sound fiscal positions are important determinants of the deep out-of-the-money euro put option prices, which embedded information on the euro crash risk during the sovereign debt crisis of 2009–2010. We also find evidence of information flow from the sovereign credit default swap market to the currency option market during the crisis.

Number of Pages in PDF File: 12

Keywords: European sovereign debt crisis, currency options, credit default swaps, currency crash

JEL Classification: F31, G13

Accepted Paper Series