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Modeling country default risk as a latent variable: a Multiple Indicators Multiple Causes (MIMIC) approach

Author

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  • Dominik Maltritz

    (Faculty of Business and Economics - TU Dresden - Technische Universität Dresden = Dresden University of Technology)

  • Andreas Buehn

    (Faculty of Business and Economics - TU Dresden - Technische Universität Dresden = Dresden University of Technology)

  • Stefan Eichler

    (Faculty of Business and Economics - TU Dresden - Technische Universität Dresden = Dresden University of Technology)

Abstract

We study the determinants of country default risk by applying a Multiple Indicators Multiple Causes (MIMIC) model. This accounts for the fact that country default risk is an unobservable variable. Whereas existing (regression-based) approaches typically use only one of several possible country default risk indicators as the dependent variable, the MIMIC model enables us to consider several indicators at once. The simultaneous consideration of sovereign yield spreads and S&P ratings may help to improve the identification of the latent country default risk. Our results confirm most of the literature's main findings regarding important determinants of country default risk, refute others and provide new evidence to controversial questions.

Suggested Citation

  • Dominik Maltritz & Andreas Buehn & Stefan Eichler, 2011. "Modeling country default risk as a latent variable: a Multiple Indicators Multiple Causes (MIMIC) approach," Post-Print hal-00730230, HAL.
    • Handle: RePEc:hal:journl:hal-00730230
    DOI: 10.1080/00036846.2010.528369
    Note: View the original document on HAL open archive server: https://hal.science/hal-00730230
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    References listed on IDEAS

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