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

12 Pages Posted: 28 Jun 2010 Last revised: 5 Jul 2012

See all articles by Cho-Hoi Hui

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Date Written: March 24, 2011

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.

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

JEL Classification: F31, G13

Suggested Citation

Hui, Cho-Hoi and Chung, Tsz-Kin, Crash Risk of the Euro in the Sovereign Debt Crisis of 2009-2010 (March 24, 2011). Journal of Banking and Finance, Vol. 35, pp. 2945–2955, 2011. Available at SSRN: https://ssrn.com/abstract=1629517

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Tsz-Kin Chung (Contact Author)

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan

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