Redenomination-Risk Spillovers in the Eurozone

11 Pages Posted: 24 Sep 2018 Last revised: 25 Nov 2018

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Date Written: November 25, 2018

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 Delta-CoVaR, 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.

Keywords: redenomination risk; credit default swap; quanto-CDS

JEL Classification: G1, G15, F3, F34

Suggested Citation

Borri, Nicola, Redenomination-Risk Spillovers in the Eurozone (November 25, 2018). Economics Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3244471 or http://dx.doi.org/10.2139/ssrn.3244471

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

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