Redenomination Risk

Abstract

Abstract 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.

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