The Effects of Redenomination Risk on Sovereign Spreads During the Euro Crisis A Review of Empirical Evidence

Redenomination risk has been the object of increasing research in the fields of macroeconomics. This master thesis serves several purposes. First, it gathers the disseminated state-of-the-art research on redenomination risk in a single comprehensive and exhaustive document. Second, it discusses the different measures conceptually, identifying the underlying logic of each measure and highlighting their advantages and limitations. Third, it provides an in-depth analysis of the potential effects of a Euro breakup in the financial instruments that are used to measure redenomination risk. More specifically, it navigates the intricacies of the 2014 ISDA definitions. Eventually, the thesis provides guidance for future research as to improve our understanding of redenomination and its impact. Whereas there is enough evidence on the essential role that redenomination played driving the sovereign spreads of peripheral countries to record highs, we find that there is not a consensual view on how a euro break-up would affect certain core-countries, such as France. Since the source of break-up concerns has nowadays shifted from investors screens to voting polls, having a unified approach to redenomination cannot be more relevant.