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What Can Currency Crisis Models Tell Us about the Risk of Withdrawal from the EMU? Evidence from ADR Data
Author(s) -
EICHLER STEFAN
Publication year - 2011
Publication title -
jcms: journal of common market studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.54
H-Index - 90
eISSN - 1468-5965
pISSN - 0021-9886
DOI - 10.1111/j.1468-5965.2010.02156.x
Subject(s) - credit default swap , devaluation , financial crisis , monetary economics , financial system , currency , economics , bond , receipt , stock (firearms) , currency crisis , credit risk , business , finance , mechanical engineering , accounting , macroeconomics , engineering
Abstract We study whether ADR (American depositary receipt) investors perceive the risk that countries such as Greece, Ireland, Italy, Portugal or Spain could leave the eurozone to address financial problems produced by the sub‐prime crisis. Using daily data, we analyse the impact of vulnerability measures related to currency crisis theories on ADR returns. We find that ADR returns fall when yield spreads of sovereign bonds or CDSs (credit default swaps) rise (i.e. when debt crisis risk increases); when banks' CDS premiums rise or stock returns fall (i.e. when banking crisis risk increases); or when the euro's overvaluation increases (i.e. when the risk of competitive devaluation increases).