Pricing Sovereign Credit Risk of an Emerging Market

31 Pages Posted: 29 Jun 2016

See all articles by Gonzalo Camba-Mendez

Gonzalo Camba-Mendez

European Central Bank (ECB)

Konrad Kostrzewa

NBP

Anna Marszal

Independent

Dobromil Serwa

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

Multiple version iconThere are 3 versions of this paper

Date Written: June 29, 2016

Abstract

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 recent global financial crisis. Our results suggest the presence of a low LGD and a relatively high PD for Poland during the crisis. The highest PD is in the months following the 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, Poland

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

Suggested Citation

Camba-Mendez, Gonzalo and Kostrzewa, Konrad and Marszal, Anna and Serwa, Dobromil, Pricing Sovereign Credit Risk of an Emerging Market (June 29, 2016). ECB Working Paper No. 1924, Available at SSRN: https://ssrn.com/abstract=2802045

Gonzalo Camba-Mendez (Contact Author)

European Central Bank (ECB) ( email )

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

Konrad Kostrzewa

NBP ( email )

United States

Anna Marszal

Independent ( email )

Dobromil Serwa

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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