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Sovereign Risk and Asset and Liability Management

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  • Udaibir S. Das
  • Yinqiu Lu
  • Michael G Papaioannou
  • Iva Petrova
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    Abstract

    Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial risk management. This paper discusses some salient features embedded in in the current generation of sovereign asset and liability management (SALM) approaches, including objectives, definitions of relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These elements are used in developing an analytical SALM framework which could become an operational instrument in formulating asset management and debtor liability management strategies at the sovereign level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines institutional requirements in implementing an SALM framework and seeks to lay the ground for further policy and analytical work on this topic.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/241.

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    Length: 44
    Date of creation: 04 Oct 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/241

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    Related research

    Keywords: Financial risk; Asset management; Risk management; Sovereign debt; Debt strategy; Accounting; central bank; government debt; currency composition; external debt; currency debt; short-term debt; debt service; debt structure; domestic currency; public debt; debt servicing; foreign currency debt; domestic debt; balance of payments; debt obligations; debt portfolio; currency composition of debt; debt stock; currency mismatches; currency risk; central banks; debt portfolios; external debt service; liquid reserves; reserve assets; debt management strategy; ratio of debt; local-currency debt; current account; debt manager; debt problems; external short-term debt; debt management office; current account balance; debt refinancing; debt managers; amount of debt; debt rescheduling; private debt; liquidity crisis; debt strategies; domestic absorption; reserve portfolio; long-term debt; international lending;

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    1. Gong, Gang & Semmler, Willi, 2006. "Stochastic Dynamic Macroeconomics: Theory and Empirical Evidence," OUP Catalogue, Oxford University Press, number 9780195301625.
    2. Bohn, Henning, 2002. "Government Asset and Liability Management in a Era of Vanishing Public Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 887-933, August.
    3. Alessandro Missale, . "Optimal Debt Management with a Stability and Growth Pact," Working Papers 166, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. 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.
    5. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
    6. David Jamieson Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Working Papers 07-13, Bank of Canada.
    7. repec:fth:calaec:1-02 is not listed on IDEAS
    8. Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-65, September.
    9. Jan-Peter Olters & Daniel Leigh, 2006. "Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy," IMF Working Papers 06/193, International Monetary Fund.
    10. Oecd, 2005. "Overview of Advances in Risk Management of Government Debt," Financial Market Trends, OECD Publishing, vol. 2005(1), pages 117-134.
    11. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
    12. Topaloglou, Nikolas & Vladimirou, Hercules & Zenios, Stavros A., 2008. "A dynamic stochastic programming model for international portfolio management," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1501-1524, March.
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