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Country Default Probabilities: Assessing and Backtesting

  • Vogl, Konstantin
  • Maltritz, Dominik
  • Huschens, Stefan
  • Karmann, Alexander
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    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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    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
    Date of revision:
    Handle: RePEc:zbw:tuddps:1206
    Contact details of provider: Postal: 01062 Dresden
    Phone: ++49 351 463 2196
    Fax: ++49 351 463 7739
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    1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Claessens, Stijn & van Wijnbergen, Sweder, 1993. "Secondary Market Prices and Mexico's Brady Deal," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 967-82, November.
    3. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    4. Pesaran, M.H. & Timmermann, A., 1990. "A Simple Non-Parametric Test Of Predictive Performance," Papers 29, California Los Angeles - Applied Econometrics.
    5. 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, vol. 10(4), pages 461-462.
    6. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
    7. Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167.
    8. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    9. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
    10. 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, vol. 39(3), pages 611-25, July.
    11. Geske, Robert, 1977. "The Valuation of Corporate Liabilities as Compound Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 541-552, November.
    12. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May.
    13. Fisher, Lawrence, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 625-27, July.
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