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Euro at risk: The impact of member countries' credit risk on the stability of the common currency

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  • Bekkour, Lamia
  • Jin, Xisong
  • Lehnert, Thorsten
  • Rasmouki, Fanou
  • Wolff, Christian

Abstract

In this paper, we propose a new indicator of Euro stability. We make use of this new indicator and empirically investigate the impact of changes in sovereign risk of Eurozone member countries on the stability of the Euro. The stability of the Euro is proxied by decomposing Dollar–Euro exchange rate options into the moments of the risk-neutral distribution. Our stability measure can nicely separate periods of Dollar instability (the subprime crisis period) and Euro instability (the sovereign debt crisis period). In particular, we document that only during the sovereign debt crisis, changes in the creditworthiness of member countries with vulnerable fiscal positions have a significant impact on the stability of the common currency. Interestingly, however, the market perceives Greece not to be ‘systemically relevant’.

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  • Bekkour, Lamia & Jin, Xisong & Lehnert, Thorsten & Rasmouki, Fanou & Wolff, Christian, 2015. "Euro at risk: The impact of member countries' credit risk on the stability of the common currency," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 67-83.
    • Handle: RePEc:eee:empfin:v:33:y:2015:i:c:p:67-83
    DOI: 10.1016/j.jempfin.2015.06.004
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    Cited by:

    1. Lin, Yuehao & Lehnert, Thorsten & Wolff, Christian, 2019. "Skewness risk premium: Theory and empirical evidence," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 174-185.
    2. Yunus AÇCI & Selim KAYHAN & Tayfur BAYAT, 2018. "The effect of credit default swap premiums on developing markets’ economies: The case of exchange rates," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(617), W), pages 235-252, Winter.
    3. Kräussl, Roman & Lehnert, Thorsten & Senulytė, Sigita, 2016. "Euro crash risk," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 417-428.
    4. Kräussl, Roman & Lehnert, Thorsten & Stefanova, Denitsa, 2016. "The European sovereign debt crisis: What have we learned?," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 363-373.
    5. Muhsin Kar & Tayfur Bayat & Selim Kayhan, 2016. "Impacts of Credit Default Swaps on Volatility of the Exchange Rate in Turkey: The Case of Euro," IJFS, MDPI, vol. 4(3), pages 1-18, July.
    6. Thorsten Lehnert & Yuehao Lin & Nicolas Martelin, 2013. "Stein s Overreaction Puzzle: Option Anomaly or Perfectly Rational Behavior?," LSF Research Working Paper Series 13-11, Luxembourg School of Finance, University of Luxembourg.

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    More about this item

    Keywords

    European sovereign debt crisis; Currency options; Credit default swaps; Currency stability; Crash risk; Sovereign capital structure arbitrage;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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