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A Structural Balance Sheet Model of Sovereign Credit Risk

Author

Listed:
  • 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.

Suggested Citation

  • Pascal François & Georges Hübner & Jean-Roch Sibille, 2011. "A Structural Balance Sheet Model of Sovereign Credit Risk," Finance, Presses universitaires de Grenoble, vol. 32(2), pages 137-165.
  • Handle: RePEc:cai:finpug:fina_322_0137
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    References listed on IDEAS

    as
    1. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
    2. Hayri, Aydin, 2000. "Debt relief," Journal of International Economics, Elsevier, vol. 52(1), pages 137-152, October.
    3. 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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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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