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Redenomination-risk spillovers in the Eurozone

Nicola Borri

Economics Letters, 2019, vol. 174, issue C, 173-178

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 ΔCoVaR, 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 (search for similar items in EconPapers)
JEL-codes: G1 G15 F3 F34 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.econlet.2018.11.013

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