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Measuring sovereign credit risk using a structural model approach

Author

Listed:
  • Han-Hsing Lee

    (National Chiao Tung University)

  • Kuanyu Shih

    (National Chiao Tung University)

  • Kehluh Wang

    (National Chiao Tung University)

Abstract

In this paper, we use three structural models to investigate a country’s credit risk by applying it to a sovereign balance sheet. The transformed-data maximum likelihood estimation method and the maximization–maximization algorithm are adopted for model calibration. The derived probability of default over time for four sample countries matched well with the events and economic conditions that occurred during the sample period. Our empirical analyses show that structural models can be used to determine with high accuracy whether the credit of a sovereign country is in a precarious situation. We then illustrate how the structural approach can be an effective tool to monitor the sovereign credit risk.

Suggested Citation

  • Han-Hsing Lee & Kuanyu Shih & Kehluh Wang, 2016. "Measuring sovereign credit risk using a structural model approach," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1097-1128, November.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0532-2
    DOI: 10.1007/s11156-015-0532-2
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    2. Oleg Sokolinskiy, 2019. "Debt rollover-induced local volatility model," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1065-1084, May.

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    More about this item

    Keywords

    Sovereign credit risk; Structural model; Default probability; CDS;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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