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Mapping of sovereign risks in small island economies: An application of contingent claim approach to fiji

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  • Devendra Kumar Jain
  • Rup Singh
  • Arvind Patel
  • Evan Lau

Abstract

While a decline in the market value of sovereign assets (below a benchmark level of liabilities) can trigger sovereign distress/default risk, volatility in sovereign assets can increase the risk premium on domestic debt and credit spread on external debt. These can escalate the probability of debt default. Therefore, measuring the probability and distance to debt distress associated with sovereign positions is important for assessing the macro-financial risks of an aggregate economy. This paper presents an application of the Contingent Claim Approach (CCA) for measuring the implied asset value and its volatility for the case of Fiji. The CCA captures non-linear changes to sovereign assets and liabilities that are hardly captured by other macroeconomic variables. Our consistent empirical findings indicate no sovereign debt distress for Fiji. Unavailability of partial data on the certain composition of sovereign assets and liabilities is a limitation, but our results are consistent and useful guide to debt policy in Fiji. It is also useful for future research on debt sustainability in other similar smaller developing economies.

Suggested Citation

  • Devendra Kumar Jain & Rup Singh & Arvind Patel & Evan Lau, 2020. "Mapping of sovereign risks in small island economies: An application of contingent claim approach to fiji," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1727158-172, January.
    • Handle: RePEc:taf:oaefxx:v:8:y:2020:i:1:p:1727158
    DOI: 10.1080/23322039.2020.1727158
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    Cited by:

    1. Florent Kanga GBONGUE & Lambert N’Galadjo BAMBA, 2023. "Le modèle hybride de la structure par terme des primes souveraines de crédit et de liquidité dans la zone UEMOA," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 57, pages 101-145.
    2. Devendra Kumar Jain & Rup Singh & Henali Kumar & Nikeel Kumar & Arvind Patel, 2022. "Why does currency denomination in external liabilities of small island developing states matter? Evidence from Fiji," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 9(3), pages 447-464, September.

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