The Term Structure of Redenomination Risk

Christian Bayer, Chi Hyun Kim and Alexander Kriwoluzky

No 1740, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

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 (search for similar items in EconPapers)
JEL-codes: E44 F31 F33 F45 G12 G14 (search for similar items in EconPapers)
Pages: 40 p.
Date: 2018
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: The term structure of redenomination risk (2018)
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