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Redenomination risk in eurozone corporate bond spreads

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  • Michael Bleaney
  • Veronica Veleanu

Abstract

We investigate the risk spillover from euro area government bond spreads (relative to a safe German government bond of similar maturity) to nonfinancial corporate bonds in France, the Netherlands (‘hard’ euro-area countries), and Italy, Portugal and Spain (‘soft’ euro-area countries). In addition to standard firm- and bond-specific determinants of corporate bonds (capturing liquidity and tax effects, and other euro area macroeconomic risks), we show that there is significant risk transfer from government bonds to the nonfinancial corporate sector. After decomposing the government bond spread into a default risk and a currency redenomination risk component, associated with a possible split in the euro, we find that redenomination risk has been a significant factor in the pricing of corporate bonds, particularly in the ‘soft’ euro-area countries.

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  • Michael Bleaney & Veronica Veleanu, 2021. "Redenomination risk in eurozone corporate bond spreads," The European Journal of Finance, Taylor & Francis Journals, vol. 27(13), pages 1303-1325, September.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:13:p:1303-1325
    DOI: 10.1080/1351847X.2021.1882524
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    Cited by:

    1. Darko B. Vukovic & Carlos J. Rincon & Moinak Maiti, 2021. "Price distortions and municipal bonds premiums: evidence from Switzerland," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-21, December.

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