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Crash risk of the euro in the sovereign debt crisis of 2009-2010

  • Hui, Cho-Hoi
  • Chung, Tsz-Kin
Registered author(s):

    The economic-political instability of a country, which is tied to its credit risk, often leads to sharp depreciation and heightened volatility in its currency. This paper shows that not only the creditworthiness of the euro-area countries with weaker fiscal positions but also that of the member countries with more sound fiscal positions are important determinants of the deep out-of-the-money euro put option prices, which embedded information on the euro crash risk during the sovereign debt crisis of 2009-2010. We also find evidence of information flow from the sovereign credit default swap market to the currency option market during the crisis.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611001257
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 11 (November)
    Pages: 2945-2955

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:11:p:2945-2955
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    5. Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2005. "Explaining credit default swap spreads with the equity volatility and jump risks of individual firms," Finance and Economics Discussion Series 2005-63, Board of Governors of the Federal Reserve System (U.S.).
    6. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, vol. 84(1), pages 110-141, April.
    7. Farhi, Emmanuel & Fraiberger, Samuel P. & Gabaix, Xavier & Rancière, Romain & Verdelhan, Adrien, 2009. "Crash Risk in Currency Markets," CEPR Discussion Papers 7322, C.E.P.R. Discussion Papers.
    8. Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 427-454, September.
    9. Cao, Charles & Yu, Fan & Zhong, Zhaodong, 2010. "The information content of option-implied volatility for credit default swap valuation," Journal of Financial Markets, Elsevier, vol. 13(3), pages 321-343, August.
    10. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2007. "How Sovereign is Sovereign Credit Risk?," NBER Working Papers 13658, National Bureau of Economic Research, Inc.
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