Measuring and Analyzing Sovereign Risk with Contingent Claims

By Michael T. Gapen, Dale F. Gray, Cheng Hoon Lim, Yingbin Xiao

August 1, 2005

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Michael T. Gapen, Dale F. Gray, Cheng Hoon Lim, and Yingbin Xiao. Measuring and Analyzing Sovereign Risk with Contingent Claims, (USA: International Monetary Fund, 2005) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper develops a comprehensive new framework to measure and analyze sovereign risk. Since traditional macroeconomic vulnerability indicators and accounting-based measures do not address risk in a comprehensive and forward-looking way, the contingent claims approach is used to construct a marked-to-market balance sheet for the sovereign, and derive a set of credit-risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the risk indicators to be robust and highly correlated with market spreads. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy.

Subject: Asset valuation, Credit risk, Financial statements, Foreign currency debt, Government liabilities

Keywords: Asset value, Balance sheet, Sovereign assets, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/155
Stock No:

WPIEA2005155
ISBN:

9781451861747
ISSN:

1018-5941

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