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The Term Structure of Redenomination Risk

Discussion Papers 1740, 40 S.

Christian Bayer, Chi Hyun Kim, Alexander Kriwoluzky


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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 the risk of a breakup successfully did so for Italy, but increased it for France and Germany.

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department

JEL-Classification: E44;F31;F33;F45;G12;G14
Keywords: Euro crisis, redenomination risk, Yield curve, ECB interventions
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