The Term Structure of Redenomination Risk

42 Pages Posted: 12 Jun 2018

See all articles by Christian Bayer

Christian Bayer

University of Bonn

Chi Hyun Kim

Independent

Alexander Kriwoluzky

Martin Luther University of Halle-Wittenberg

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

Abstract

This paper assesses redenomination risk in the euro area. We first estimate daily default-risk-free yield curves for French, German, and Italian bonds that can be redenominated and for bonds that cannot. Then, we extract the compensation for redenomination risk from the yield spreads between these two types of bonds. Redenomination risk primarily shows up at the short end of yield curves. At the height of the euro crisis, spreads between first-year yields were close to 7% for Italy and up to -2% for Germany. The ECB's interventions designed to reduce the risk of a breakup successfully did so for Italy, but increased it for France and Germany.

Keywords: Euro crisis, redenomination risk, Yield curve, ECB interventions

JEL Classification: E44,F31,F33,F45,G12,G14

Suggested Citation

Bayer, Christian and Kim, Chi Hyun and Kriwoluzky, Alexander, The Term Structure of Redenomination Risk (June 2018). DIW Berlin Discussion Paper No. 1740, Available at SSRN: https://ssrn.com/abstract=3194420 or http://dx.doi.org/10.2139/ssrn.3194420

Christian Bayer

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Chi Hyun Kim

Independent ( email )

Alexander Kriwoluzky (Contact Author)

Martin Luther University of Halle-Wittenberg ( email )

Emil-Abderhalden-Str. 7
Halle an der Saale
06099 Halle (Saale), DE Sachsen-Anhalt 06099
Germany

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