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Country Default Probabilities: Assessing and Backtesting

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  • Vogl, Konstantin
  • Maltritz, Dominik
  • Huschens, Stefan
  • Karmann, Alexander
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    Abstract

    We address the problem how to estimate default probabilities for sovereign countries based on market data of traded debt. A structural Merton-type model is applied to a sample of emerging market and transition countries. In this context, only few and heterogeneous default probabilities are derived, which is problematic for backtesting. To deal with this problem, we construct likelihood ratio test statistics and quick backtesting procedures. --

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    Bibliographic Info

    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 12/06.

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    Date of creation: 2006
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    Handle: RePEc:zbw:tuddps:1206

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    Related research

    Keywords: Sovereign default; Country risk; Default probability; Likelihood ratio test;

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    1. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
    2. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, American Finance Association, vol. 39(3), pages 611-25, July.
    3. Pesaran, M.H. & Timmermann, A., 1990. "A Simple, Non-Parametric Test Of Predictive Performance," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9021, Faculty of Economics, University of Cambridge.
    4. Fisher, Lawrence, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, American Finance Association, vol. 39(3), pages 625-27, July.
    5. Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 4(2), pages 155-167.
    6. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, American Finance Association, vol. 31(2), pages 351-67, May.
    8. Geske, Robert, 1977. "The Valuation of Corporate Liabilities as Compound Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 541-552, November.
    9. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(1), pages 63-81, March.
    10. Jin-Chuan Duan, 2000. "Correction: Maximum Likelihood Estimation Using Price Data of the Derivative Contract (Mathematical Finance 1994, 4/2, 155-167)," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 10(4), pages 461-462.
    11. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(2), pages 707-735, March.
    12. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(1-2), pages 59-117, January.
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