Pricing Sovereign Credit Risk of an Emerging Market

32 Pages Posted: 19 Aug 2015

See all articles by Gonzalo Camba-Mendez

Gonzalo Camba-Mendez

European Central Bank (ECB)

Konrad Kostrzewa


Anna Marszal (Mospan)

National Bank of Poland; Lodz University of Technology

Dobromil Serwa

National Bank of Poland; Warsaw School of Economics (SGH)

Multiple version iconThere are 3 versions of this paper

Date Written: October 18, 2014


We analyze the market assessment of sovereign credit risk in an emerging market using a reduced-form model to price the credit default swap (CDS) spreads thus enabling us to derive values for the probability of default (PD) and loss given default (LGD) from the quotes of sovereign CDS contracts. We compare different specifications of the models allowing for both fixed and time varying LGD, and we use these values to analyze the sovereign credit risk of Polish debt throughout the period of a global financial crisis. Our results suggest the presence of a low LGD and a relatively high PD for Poland during a recent financial crisis. The highest PD is in the months following collapse of Lehman Brothers. The derived measures of sovereign risk are strongly linked with the level of public debt and with another measure of PD from a structural model. Correlations between our PD values and the CDS spreads heavily depend on the maturity of the sovereign CDS.

Keywords: sovereign credit risk, CDS spreads, probability of default, loss given default

JEL Classification: C11, C32, G01, G12, G15

Suggested Citation

Camba-Mendez, Gonzalo and Kostrzewa, Konrad and Marszal (Mospan), Anna and Serwa, Dobromil, Pricing Sovereign Credit Risk of an Emerging Market (October 18, 2014). Available at SSRN: or

Gonzalo Camba-Mendez (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Konrad Kostrzewa

NBP ( email )

United States

Anna Marszal (Mospan)

National Bank of Poland ( email )

00-919 Warsaw

Lodz University of Technology ( email )

Zeromskiego 116
Lodz, 90-924

Dobromil Serwa

National Bank of Poland ( email )

00-919 Warsaw

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554

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