The Role of Redenomination Risk in the Price Evolution of Italian Banks' CDS Spreads

Michele Anelli, Michele Patanè, Mario Toscano, Stefano Zedda
2020 Journal of Risk and Financial Management  
The recent financial crisis offered an interesting opportunity to analyze the markets' behavior in a high-volatility framework. In this paper, we analyzed the price discovery process of the Italian banks' Credit Default Swap (CDS) spreads through the Merton model, extended with the inclusion of a redenomination risk proxy, as to say, the risk that Italy could leave the eurozone. This paper contributes to the literature by integrating the classic Merton model with a political-sensitive market
more » ... sensitive market variable able to explain the greatest variance in the Italian banks' CDS spreads during the most relevant and commonly recognized periods of socio-political and financial distress. Results show that the redenomination risk is progressively becoming the main driver of the process during crises, in particular for the sovereign debt crisis and in 2018.
doi:10.3390/jrfm13070150 fatcat:z5jgmldtr5ditliqymc3wt3bzq