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Euro crash risk

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  • Kräussl, Roman
  • Lehnert, Thorsten
  • Senulytė, Sigita

Abstract

We identify crucial events during the European sovereign debt crisis and investigate their impact on the euro currency. In particular, we analyze how specific announcements related to vulnerable eurozone member states, European Central Bank (ECB) actions, and credit rating downgrades affect the value and the crash risk of the euro. We proxy the appreciation and depreciation of the euro by its abnormal foreign exchange (FX) rate returns with respect to 35 currencies. The crash risk of the euro is proxied by the conditional skewness of the FX rate return distribution with respect to the same currencies. We find that the market reacts positively to news related to countries under EU/IMF rescue umbrella. We discover that ECB actions on average result in a euro depreciation on the day of the announcement reflecting obvious concerns of market participants, but the effect is partly reversed the day after. Our analysis also shows that sovereign and corporate credit rating downgrades tend to lead to a depreciation of the euro and, more importantly, to an increase of the euro crash risk. Interestingly, we find that specific announcements about Greece on average do not substantially affect the euro exchange rate directly; however, it does have an overall significant effect on the euro crash risk, imposing a substantial risk for the stability of the common currency in the eurozone.

Suggested Citation

  • Kräussl, Roman & Lehnert, Thorsten & Senulytė, Sigita, 2016. "Euro crash risk," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 417-428.
  • Handle: RePEc:eee:empfin:v:38:y:2016:i:pa:p:417-428
    DOI: 10.1016/j.jempfin.2016.01.007
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Sovereign debt crisis; News announcements; Euro value; Euro crash risk;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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