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Country Default Probabilities: Assessing and Backtesting

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

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.

Suggested Citation

  • Vogl, Konstantin & Maltritz, Dominik & Huschens, Stefan & Karmann, Alexander, 2006. "Country Default Probabilities: Assessing and Backtesting," Dresden Discussion Paper Series in Economics 12/06, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    • Handle: RePEc:zbw:tuddps:1206
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign default; Country risk; Default probability; Likelihood ratio test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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