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The term structure of redenomination risk

Christian Bayer (), Chi Hyun Kim and Alexander Kriwoluzky

No 12965, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 breakup risk successfully did so for Italy, but increased it for France and Germany.

Keywords: ECB Interventions; Eurocrisis; redenomination risk; yield curve (search for similar items in EconPapers)
JEL-codes: E44 F31 F33 F45 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-05
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