6533b82cfe1ef96bd128eabd
RESEARCH PRODUCT
Breakup and default risks in the great lockdown
Andrea ConsiglioNicola BorriGiovanni Bonaccoltosubject
CovarEconomics and Econometrics2019-20 coronavirus outbreakCoronavirus disease 2019 (COVID-19)BondDepreciationElastic netCOVID-19Monetary economicsBreakupMarket liquidityShock (economics)redenomination riskdefault riskCoVaRElastic NetCOVID-19Settore SECS-S/06 -Metodi Mat. dell'Economia e d. Scienze Attuariali e Finanz.Default riskRedenomination riskEconomicsDefaultFinancedescription
Abstract In 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.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2023-02-01 | Journal of Banking & Finance |