The Impact of a Sovereign Default within the Euro Zone on the Exchange Rate

Arne Breuer and Oliver Sauter

Applied Economics Quarterly (formerly: Konjunkturpolitik), 2012, vol. 58, issue 1, 1-18

Abstract: We use quanto credit default swaps to analyse the impact of a credit event in the Eurozone on the Dollar-Euro exchange rate. In light of the European debt crisis, market participants are willing to pay more for protection against a sovereign credit event if it is denominated in US Dollars rather than in Euro, because they expect the Euro to depreciate in the wake of the credit event. We use this CDS price difference to calculate the implied exchange rate conditional on a credit event, i.e., the default of a member of the Euro zone. We find that the implied effect is heterogeneous across the different countries. We identify three country groups for which the implied effect on the exchange rate develops similarly over the time horizon of our data set.

Keywords: Sovereign Default; Credit Default Swap (CDS); Euro Zone; Exchange Rate (search for similar items in EconPapers)
JEL-codes: E6 F3 G1 G2 (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.3790/aeq.58.1.1 (application/pdf)
Access to full text is restricted to subscribers (2008 onwards); Pay-per-view access from http://ejournals.duncker-humblot.de/loi/aeq or from http://www.genios.de (2006 onwards with 2 years moving wall)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aeq:aeqaeq:v58_y2012_i1_q1_p1-18

Ordering information: This journal article can be ordered from
http://www.duncker-h ... nomicsquarterly.html

Access Statistics for this article

Applied Economics Quarterly (formerly: Konjunkturpolitik) is currently edited by Ansgar Belke, Uwe Sunde and Winfried Koeniger

More articles in Applied Economics Quarterly (formerly: Konjunkturpolitik) from Duncker & Humblot, Berlin
Bibliographic data for series maintained by Deborah Anne Bowen ( this e-mail address is bad, please contact ).