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A Structural Balance Sheet Model of Sovereign Credit Risk

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  • Pascal François
  • Georges Hübner
  • Jean-Roch Sibille

Abstract

This article studies sovereign credit spreads using a contingent claims model and a balance sheet representation of the sovereign economy. Analytical formulae for domestic and external debt values as well as for the financial guarantee are derived in a framework where recovery rate is endogenously determined as the solution of a strategic bargaining game. The approach allows to relate sovereign credit spreads to observable macroeconomic factors, and in particular accounts for contagion effects through the corporate and banking sectors. Pricing performance as well as predictions about credit spread determinants are successfully tested on the Brazilian economy.

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2011/CIRPEE11-41.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1141.

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Date of creation: 2011
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Handle: RePEc:lvl:lacicr:1141

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Related research

Keywords: Sovereign credit spread; Balance sheet; Recovery rate; Contingent claims analysis; Contagion effects;

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  1. Hayri, A., 1996. "Debt Relief," The Warwick Economics Research Paper Series (TWERPS) 459, University of Warwick, Department of Economics.
  2. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
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