Evaluation and Comparison of Market and Rating Based Country Default Risk Assessment

26 Pages Posted: 18 Apr 2010

See all articles by Dominik Maltritz

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management

Alexander Karmann

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: April 1, 2010

Abstract

We compare two different approaches to assess country default risk by evaluating their forecast accuracy. In particular we analyze whether market based or rating based risk assessment is superior. To evaluate the forecast accuracy we analyze the differences between several default risk measures and realizations of defaults/non defaults in the forecast period. The considered risk measures are, on the one hand, default probabilities and binary crisis forecasts (default/non default), on the other. Within a sample of 19 emerging market countries in 1998 to 2007 we find that risk measures derived by reduced form credit risk models from market data outperform ratings of S&P.

Keywords: sovereign risk, ratings, yield spreads, forecast accuracy, country

JEL Classification: F34

Suggested Citation

Maltritz, Dominik and Karmann, Alexander J., Evaluation and Comparison of Market and Rating Based Country Default Risk Assessment (April 1, 2010). Frontiers in Finance and Economics, Vol. 7, No. 1, pp. 34-59, 2010. Available at SSRN: https://ssrn.com/abstract=1590942

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Alexander J. Karmann (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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