Eurozone Exit Risk

Abstract

We introduce a novel indicator of eurozone exit risk based on American Depositary Receipts
(ADRs). We exploit ADR investors’ exposure to potential losses associated with a eurozone
exit, e.g. due to redenomination of underlying stocks into the new devaluated currency, capital
controls or trading halts. We are the first to analyze the effects of eurozone exit risk on banks
and non-financial firms. European banks are negatively affected by exit risk of Greece, Ireland
and Portugal, channeled through bilateral credit risk. Non-financial firms in the GIIPS countries
respond negatively to domestic exit risk, while a lower ratio of short-term debt to cash and
larger company size reduce this exposure.

Keywords: Eurozone Exit Risk; American Depositary Receipts; Exposure of banks and non-financial companies

JEL Classification: F31, F32, G01, G12, G15