Measuring and Analyzing Sovereign Risk with Contingent Claims

Author/Editor:

Michael T. Gapen ; Dale F. Gray ; Cheng Hoon Lim ; Yingbin Xiao

Publication Date:

August 1, 2005

Electronic Access:

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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 develops a comprehensive new framework to measure and analyze sovereign risk. Since traditional macroeconomic vulnerability indicators and accounting-based measures do not address risk in a comprehensive and forward-looking way, the contingent claims approach is used to construct a marked-to-market balance sheet for the sovereign, and derive a set of credit-risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the risk indicators to be robust and highly correlated with market spreads. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy.

Series:

Working Paper No. 2005/155

Subject:

Asset valuation Credit risk Financial statements Foreign currency debt Government liabilities

English

Publication Date:

August 1, 2005

ISBN/ISSN:

9781451861747/1018-5941

Stock No:

WPIEA2005155

Pages:

49

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