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Redenomination Risk
Author(s) -
DE SANTIS ROBERTO A.
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12582
Subject(s) - benchmark (surveying) , asset (computer security) , currency , monetary economics , business , credit risk , foreign exchange risk , yield (engineering) , credit default swap , systemic risk , economics , sovereignty , financial system , actuarial science , financial crisis , geography , macroeconomics , political science , computer science , materials science , computer security , geodesy , politics , law , metallurgy
Euro redenomination risk is the risk that a euro asset is redenominated into a devalued legacy currency. We propose a time‐varying, country‐specific intra‐euro area redenomination risk measure, defined as the quanto credit default swaps (CDS) of a member country relative to the quanto CDS of a benchmark member country. Focusing on Italy, Spain, and France and using Germany as benchmark, we show that the redenomination risk shocks significantly affect sovereign yield spreads, with Italy and Spain being most adversely affected. Finally, foreign redenomination risk shocks spill over and above local redenomination risk shocks, suggesting that this risk is systemic.