A Critique of the Contingent Claims Approach to Sovereign Risk Analysis
Rahmi Erdem Aktug
The Richard Stockton College of New Jersey
Tolga Han Seyhan
affiliation not provided to SSRN
April 13, 2011
In this paper, we examine the Contingent Claims Approach (CCA) to analyzing sovereign risk. Specifically, we extend the study by Gray et al. (2007), and apply the Merton Modeling framework to three major emerging markets; Brazil, Mexico, and Turkey over the period 2001 to 2007. We point out the shortcomings of the CCA and suggest some remedies in calibrating to real-life risk measures. We also assess the problem from a risk management point of view and perform a historical simulation exercise to determine the Value-at-Risk.
Number of Pages in PDF File: 23
Keywords: Sovereign Risk, Contingent Claims
JEL Classification: F34, G13working papers series
Date posted: March 23, 2011 ; Last revised: April 8, 2012
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