A Critique of the Contingent Claims Approach to Sovereign Risk Analysis

26 Pages Posted: 23 Mar 2011 Last revised: 13 Aug 2014

See all articles by Erdem Aktug

Erdem Aktug

Columbia University; Morgan Stanley

Date Written: May 8, 2013

Abstract

In this study, I examine the Contingent Claims Approach (CCA) to measure sovereign risk. Specifically, I extend the study by Gray et al. (2007), and apply the CCA framework to three emerging markets, Brazil, Mexico, and Turkey over the period 2001 to 2010. I find that CCA underestimates credit default swap spreads and default probabilities. Consequently, I point out the shortcomings of CCA, and suggest some remedies.

Keywords: Sovereign Risk, Contingent Claims

JEL Classification: F34, G13

Suggested Citation

Aktug, Rahmi Erdem, A Critique of the Contingent Claims Approach to Sovereign Risk Analysis (May 8, 2013). Emerging Markets Finance and Trade, Vol. Jan-Feb, 2014, Available at SSRN: https://ssrn.com/abstract=1788683 or http://dx.doi.org/10.2139/ssrn.1788683

Rahmi Erdem Aktug (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Morgan Stanley ( email )

1585 Broadway
New York, NY 10019
United States

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