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Country Default Risk: An Empirical Assessment

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  • Jerome L. Stein
  • Giovanna Paladino

Abstract

We provide benchmarks to evaluate what is an optimal foreign debt and a maximal foreign debt (debt-max), when risk is explicitly considered. When the actual debt exceeds debt-max, then the economy will default when a "bad shock" occurs. This paper is an application of the stochastic optimal controls models of Fleming and Stein (2001), which gives empirical content to the question of how one should measure "vulnerability" to shocks, when there is uncertainty concerning the productivity of capital. We consider two sets of high- risk countries during the period 1978-99: a subset of 21 countries that defaulted on the debt, and another set of 13 countries that did not default. Default is a situation where the firms or government of a country reschedule the interest/principal payments on the external debt. We thereby explain how our analysis can anticipate default risk, and add another dimension to the literature of early warning signals of default/credit risk.

Suggested Citation

  • Jerome L. Stein & Giovanna Paladino, 2001. "Country Default Risk: An Empirical Assessment," CESifo Working Paper Series 469, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_469
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    References listed on IDEAS

    as
    1. Wendell Fleming & Jerome L. Stein, 1999. "A Stochastic Optimal Control Approach to International Finance and Foreign Debt," CESifo Working Paper Series 204, CESifo Group Munich.
    2. Stein, Jerome L. & Paladino, Giovanna, 1997. "Recent developments in international finance: A guide to research," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1685-1720, December.
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    Cited by:

    1. repec:wsi:serxxx:v:49:y:2004:i:02:n:s0217590804000858 is not listed on IDEAS
    2. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2017. "Analysis of the seeds of the debt crisis in Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 23(15), pages 1589-1610, December.
    3. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2015. "Survival Maximizing Leverage of an Economy: The Case of Greece," Working Paper series 15-17, Rimini Centre for Economic Analysis.
    4. Miguel Messmacher & Mark Kruger, 2004. "Sovereign Debt Defaults and Financing Needs," IMF Working Papers 04/53, International Monetary Fund.
    5. repec:bla:ausecp:v:56:y:2017:i:2:p:95-118 is not listed on IDEAS
    6. Fleming, Wendell H. & Stein, Jerome L., 2004. "Stochastic optimal control, international finance and debt," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 979-996, May.
    7. Jerome L. Stein, 2003. "Stochastic Optimal Control Modeling of Debt Crises," CESifo Working Paper Series 1043, CESifo Group Munich.
    8. Jerome L. Stein & Guay C. Lim, 2004. "Asian Crises: Theory, Evidence, Warning Signals," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 49(02), pages 135-161.
    9. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2014. "Analysis of The Seeds of Debt Crisis in Europe," Working Paper series 24_14, Rimini Centre for Economic Analysis.

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