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Measuring and Analyzing Sovereign Risk with Contingent Claims

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  • Michael Gapen
  • Dale Gray
  • Cheng Hoon Lim
  • Yingbin Xiao
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    Abstract

    This paper develops a comprehensive new framework to measure and analyze sovereign risk. Contingent claims analysis is used to construct a marked-to-market balance sheet for the sovereign and derive a set of forward-looking credit risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the approach to be robust, and the risk indicators are a significant improvement over traditional macroeconomic vulnerability indicators and accounting-based measures. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy. IMF Staff Papers (2008) 55, 109–148; doi:10.1057/palgrave.imfsp.9450026; published online 22 January 2008

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

    Volume (Year): 55 (2008)
    Issue (Month): 1 (April)
    Pages: 109-148

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    Handle: RePEc:pal:imfstp:v:55:y:2008:i:1:p:109-148

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    Cited by:
    1. Agostino Tarsitano & Rosetta Lombardo, 2013. "A Coefficient of Correlation Based on Ratios of Ranks and Anti-ranks," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 233(2), pages 206-224, March.
    2. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework," IMF Working Papers, International Monetary Fund 08/40, International Monetary Fund.
    3. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers, International Monetary Fund 12/203, International Monetary Fund.
    4. Udaibir S. Das & Michael G. Papaioannou & Christoph Trebesch, 2010. "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," IMF Working Papers, International Monetary Fund 10/10, International Monetary Fund.
    5. Miroslav Plasil & Ivana Kubicova, 2012. "Contingent Claims Analysis And The Inter-Sector Transmission Of Credit Risk," Occasional Publications - Chapters in Edited Volumes, Czech National Bank, Research Department, in: CNB Financial Stability Report 2011/2012, chapter 0, pages 129-139 Czech National Bank, Research Department.
    6. Jan Willem van den End & Marco Hoeberichts, 2012. "The interaction between the central bank and government in tail risk scenarios," DNB Working Papers, Netherlands Central Bank, Research Department 352, Netherlands Central Bank, Research Department.
    7. Agostino Tarsitano & Rosetta Lombardo, 2011. "An Exhaustive Coefficient Of Rank Correlation," Working Papers, Università della Calabria, Dipartimento di Economia, Statistica e Finanza (Ex Dipartimento di Economia e Statistica) 201111, Università della Calabria, Dipartimento di Economia, Statistica e Finanza (Ex Dipartimento di Economia e Statistica).
    8. Christoph Riedel & Kannan Thuraisamy & Niklas Wagner, . "Conditional Spread Determinants for Emerging Sovereign Debt," Financial Econometics Series, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance 2012_08, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    9. Kamil Janacek & Zlatuse Komarkova & Michal Hlavacek & Lubos Komarek, 2012. "Impacts Of The Sovereign Default Crisis On The Czech Financial Sector," Occasional Publications - Chapters in Edited Volumes, Czech National Bank, Research Department, in: CNB Financial Stability Report 2011/2012, chapter 0, pages 118-128 Czech National Bank, Research Department.
    10. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers, International Monetary Fund 09/29, International Monetary Fund.
    11. Cevik, Emrah Ismail & Dibooglu, Sel & Kutan, Ali M., 2013. "Measuring financial stress in transition economies," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(4), pages 597-611.
    12. Gorea, Denis & Radev, Deyan, 2014. "The euro area sovereign debt crisis: Can contagion spread from the periphery to the core?," International Review of Economics & Finance, Elsevier, Elsevier, vol. 30(C), pages 78-100.
    13. Riedel, Christoph & Thuraisamy, Kannan S. & Wagner, Niklas, 2013. "Credit cycle dependent spread determinants in emerging sovereign debt markets," Emerging Markets Review, Elsevier, Elsevier, vol. 17(C), pages 209-223.

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