A Critique of the Contingent Claims Approach to Sovereign Risk Analysis
26 Pages Posted: 23 Mar 2011 Last revised: 13 Aug 2014
Date Written: May 8, 2013
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: Suggested Citation