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Measuring and Analyzing Sovereign Risk with Contingent Claims

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  • Michael Gapen
  • Dale Gray
  • Cheng Hoon Lim
  • Yingbin Xiao

Abstract

This paper develops a comprehensive new framework to measure and analyze sovereign risk. Contingent claims analysis is used to construct a marked-to-market balance sheet for the sovereign and derive a set of forward-looking credit risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the approach to be robust, and the risk indicators are a significant improvement over traditional macroeconomic vulnerability indicators and accounting-based measures. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy. IMF Staff Papers (2008) 55, 109–148; doi:10.1057/palgrave.imfsp.9450026; published online 22 January 2008

Suggested Citation

  • Michael Gapen & Dale Gray & Cheng Hoon Lim & Yingbin Xiao, 2008. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Staff Papers, Palgrave Macmillan, vol. 55(1), pages 109-148, April.
    • Handle: RePEc:pal:imfstp:v:55:y:2008:i:1:p:109-148
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