Working Paper: CEPR ID: DP12965
Authors: Christian Bayer; Chi Kim; Alexander Kriwoluzky
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: Euro Crisis; Redenomination Risk; Yield Curve; ECB Interventions
JEL Codes: E44; F31; F33; F45; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| redenomination risk (F31) | yield spreads (G12) |
| ECB interventions (E52) | redenomination risk for Italy (F31) |
| ECB interventions (E52) | redenomination risk for France and Germany (F31) |
| yield spreads (G12) | expected changes in exchange rates (F31) |
| legal and political uncertainties (P37) | redenomination risk (F31) |