This paper aims to introduce a new indicator to measure redenomination risks in Euro area countries. The measure is based on survey data. The influence of this indicator in determining sovereign bond yield spreads is estimated.
An autoregressive distributed lag approach is used to estimate the effects of redenomination risks on sovereign bond yields. Additional control variables are added.
The results for 10 European Economic and Monetary Union (EMU) countries in the period June 2012 to May 2019 show that the risk of depreciation is almost abandoned for most Euro area countries, i.e. the former crisis countries Ireland and Portugal. If anything an appreciation may occur for some countries once they leave the EMU. The only countries facing depreciation problems once leaving the monetary union are Italy and to some extent Spain.
With this new indicator, the literature on sovereign bond determination and i.e. on redenomination risks is expanded by an additional approach. Moreover, this study is one of few also looking at the period after the most severe tensions of the sovereign debt crisis in the Euro area in 2012.
