n this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia.

Breakup and Default Risks in the Great Lockdown / Bonaccolto, Giovanni; Borri, Nicola; Consiglio, Andrea. - In: JOURNAL OF BANKING & FINANCE. - ISSN 0378-4266. - (In corso di stampa), pp. ---. [10.1016/j.jbankfin.2021.106308]

Breakup and Default Risks in the Great Lockdown

Borri, Nicola
;
In corso di stampa

Abstract

n this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia.
redenomination riskdefault riskCoVaRElastic NetCOVID-19
Breakup and Default Risks in the Great Lockdown / Bonaccolto, Giovanni; Borri, Nicola; Consiglio, Andrea. - In: JOURNAL OF BANKING & FINANCE. - ISSN 0378-4266. - (In corso di stampa), pp. ---. [10.1016/j.jbankfin.2021.106308]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11385/209775
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