Public Debt Sustainability and Management in a Compound Option Framework

January 1, 2010

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Format: Chicago

Jorge A Chan-Lau, and Andre O Santos. Public Debt Sustainability and Management in a Compound Option Framework, (USA: International Monetary Fund, 2010) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper introduces the Asset and Liability Management (ALM) compound option model. The model builds on the observation that the public sector net worth in a multi-period setting corresponds to the value of an option on an option on total government assets. Hence, the ALM compound option model is better suited for analyzing and evaluating the risk profile of public debt than existing one-period models, and is especially useful for analyzing the soundness of exit strategies from the large fiscal expansions undertaken by G-20 countries in the wake of the recent financial crisis. As an illustration, the model is used to analyze the risk profile and sustainability of Australia's public debt under different policies.

Subject: Asset and liability management, Financial institutions, Financial statements, Government debt management, Government securities, Public debt, Public financial management (PFM)

Keywords: Asset-liability management, Australia, Debt issuer, Debt management, Debt manager, Debt maturity profile, Debt payment, Debt profile, Default risk, Fair value, Financial statements, Fiscal policy, Government debt guarantee, Government debt management, Government securities, Interest rate, Market price, Market value, Maturity profile, Option model, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/002
Stock No:

WPIEA2010002
ISBN:

9781451961676
ISSN:

1018-5941

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