Measuring and Analyzing Sovereign Risk with Contingent Claims
August 1, 2005
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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.
Subject: Asset valuation, Credit risk, Financial statements, Foreign currency debt, Government liabilities
Keywords: asset value, balance sheet, sovereign assets, WP
Pages:
49
Volume:
2005
DOI:
Issue:
155
Series:
Working Paper No. 2005/155
Stock No:
WPIEA2005155
ISBN:
9781451861747
ISSN:
1018-5941
