Sovereign risk in a structural approach: Evaluating sovereign ability-to-pay and probability of default

Arbeitspapier

We quantify the probability that a sovereign defaults on repayment obligations in foreign currency. Adopting the structural approach as first introduced by Merton, we consider the sovereigns ability-to-pay, characterised by the sum of discounted future payment surpluses, as the underlying process. Its implicit volatility is inferred from market spreads. We demonstrate for the case of Latin America and Russia that our approach indicates default events well in advance of agencies and markets.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Dresden Discussion Paper Series in Economics ; No. 07/03

Classification and Topics

• Classification: Wirtschaft ; International Lending and Debt Problems
• Subject: Sovereign Risk ; Probability of Default ; Länderrisiko ; Internationale Anleihe ; US-Dollar ; Kreditrisiko ; Risikoprämie ; Optionspreistheorie ; Theorie ; Argentinien ; Ecuador ; Russland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Karmann, Alexander ; Maltritz, Dominik
• Event: Veröffentlichung
• (who): Technische Universität Dresden, Fakultät Wirtschaftswissenschaften
• (where): Dresden
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/48140
• Last update: 10.03.2025, 11:41 AM CET