Discussion Paper Details

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Title: The term structure of redenomination risk

Author(s): Christian Bayer, Chi Kim and Alexander Kriwoluzky

Publication Date: May 2018

Keyword(s): ECB Interventions, Eurocrisis, redenomination risk and yield curve

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Bayer, C, Kim, C and Kriwoluzky, A. 2018. 'The term structure of redenomination risk'. London, Centre for Economic Policy Research.