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Currency Redenomination Risk

I construct a time-series measure of currency redenomination risk in French, Italian, and German government bonds based on two types of CDS contracts. I use the measure to assess how the event of a French or Italian eurozone exit is priced in the cross-section of eurozone sovereign bonds. Yields across the eurozone hardly covary with Italian redenomination risk, but move heterogeneously with French risk: German, Austrian, and Dutch yields fall, while Portuguese yields rise. The findings are consistent with the interpretation that an Italian exit from the eurozone would remain isolated, while a French exit would involve a eurozone break-up.