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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

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    8. Sturzenegger, Federico & Zettelmeyer, Jeromin, 2008. "Haircuts: Estimating investor losses in sovereign debt restructurings, 1998-2005," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 780-805, September.
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    10. Michael T. Gapen & Mr. Dale F Gray & Cheng Hoon Lim & Ms. Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 2005/155, International Monetary Fund.
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    12. Ronn, Ehud I & Verma, Avinash K, 1986. "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-895, September.
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    Cited by:

    1. Chang Liu & Biqian Zhang & Xuefei Wang & Min Guo, 2022. "Account-level analytic hierarchical mixing modeling for credit risk of Chinese Government financing vehicle portfolios," Empirical Economics, Springer, vol. 62(6), pages 2771-2798, June.
    2. Mariya Gubareva, 2018. "Historical Interest Rate Sensitivity of Emerging Market Sovereign Debt: Evidence of Regime Dependent Behavior," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 405-442, November.

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    More about this item

    JEL classification:

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

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