Measuring and Analyzing Sovereign Risk with Contingent Claims
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 05/155.
Date of creation: 01 Aug 2005
Date of revision:
Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Arnaud Jobert & Janet Kong & Jorge A. Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 04/33, International Monetary Fund.
- Merton, Robert C, 1998.
"Applications of Option-Pricing Theory: Twenty-Five Years Later,"
American Economic Review,
American Economic Association, vol. 88(3), pages 323-49, June.
- Merton, Robert C., 1997. "Applications of Option-Pricing Theory: Twenty-Five Years Later," Nobel Prize in Economics documents 1997-1, Nobel Prize Committee.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Jan Willem van den End & Mostafa Tabbae, 2005. "Measuring Financial Stability: Applying the MfRisk Model to the Netherlands," DNB Working Papers 030, Netherlands Central Bank, Research Department.
- Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
- Akira Ariyoshi & Andrei Kirilenko & Inci Ã–tker & Bernard Laurens & Jorge IvÃ¡n Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls: Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
- Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
- Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-wide Risk Transfer," IMF Working Papers 04/121, International Monetary Fund.
- Dale Gray & Carlos García T. & Leonardo Luna B. & Jorge E. Restrepo L., 2009.
"Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile,"
Journal Economía Chilena (The Chilean Economy),
Central Bank of Chile, vol. 12(2), pages 11-33, August.
- Dale F. Gray & Carlos J. García & Leonardo Luna & Jorge E. Restrepo, 2011. "Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 6, pages 159-197 Central Bank of Chile.
- Leonardo Luna & Dale F. Gray & Jorge Restrepo & Carlos Garcia, 2011. "Incorporating Financial Sector Risk into Monetary Policy Models: Application to Chile," IMF Working Papers 11/228, International Monetary Fund.
- Dale F. Gray & Carlos Garcia & Leonardo Luna & Jorge Restrepo, 2009. "Incorporation financial sector risk into monetary policy models: application to Chile," ILADES-Georgetown University Working Papers inv229, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- Dale Gray & Carlos García & Leonardo Luna & Jorge E. Restrepo, 2009. "Incorporating Financial Sector Risk into Monetary Policy Models: Application to Chile," Working Papers Central Bank of Chile 553, Central Bank of Chile.
- Eduardo Borensztein & Ugo Panizza, 2009.
"The Costs of Sovereign Default,"
IMF Staff Papers,
Palgrave Macmillan, vol. 56(4), pages 683-741, November.
- Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009.
"New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability,"
Working Papers Central Bank of Chile
541, Central Bank of Chile.
- Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Papers 13607, National Bureau of Economic Research, Inc.
- Michael G. Papaioannou, 2006. "A Primer for Risk Measurement of Bonded Debt from the Perspective of a Sovereign Debt Manager," IMF Working Papers 06/195, International Monetary Fund.
- Martin Melecky, 2012.
"Choosing The Currency Structure Of Foreign‐Currency Debt: A Review Of Policy Approaches,"
Journal of International Development,
John Wiley & Sons, Ltd., vol. 24(2), pages 133-151, 03.
- Melecky, Martin, 2010. "Choosing the Currency Structure of Foreign-currency Debt: a Review of Policy Approaches," MPRA Paper 21268, University Library of Munich, Germany.
- Marcos Souto & Benjamin M. Tabak & Francisco Vazquez, 2009. "Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks," Working Papers Series 189, Central Bank of Brazil, Research Department.
- Roberto Savona & Marika Vezzoli, 2012. "Fitting and Forecasting Sovereign Defaults Using Multiple Risk Signals," Working Papers 2012_26, Department of Economics, University of Venice "Ca' Foscari".
- Agliardi, Elettra & Agliardi, Rossella & Pinar, Mehmet & Stengos, Thanasis & Topaloglou, Nikolas, 2012. "A new country risk index for emerging markets: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 741-761.
- Faezeh Raei & Selim Cakir, 2007. "Sukuk vs. Eurobonds: Is There a Difference in Value-at-Risk?," IMF Working Papers 07/237, International Monetary Fund.
- Eli M. Remolona & Michela Scatigna & Eliza Wu, 2008. "A ratings-based approach to measuring sovereign risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 26-39.
- Samuel Malone, 2005. "Managing Default Risk for Commodity Dependent Countries: Price Hedging in an Optimizing Model," Economics Series Working Papers 246, University of Oxford, Department of Economics.
- Münür Yayla & Alper Hekimoglu & Mahmut Kutlukaya, 2008. "Financial Stability of the Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 2(1), pages 9-26.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).
If references are entirely missing, you can add them using this form.