Model-Based Estimation of Sovereign Default Risk
38 Pages Posted: 23 Oct 2017 Last revised: 6 May 2018
Date Written: May 1, 2018
We estimate a canonical sovereign debt crisis model from Arellano (2008) for Argentina via maximum simulated likelihood estimation. Despite its focus on idiosyncratic risk, the estimated model accounts for the overall default patterns of Argentina. The model-implied business cycle properties are consistent with Arellano’s findings, with some caveats. Our novel real-time default probability measure, which exploits model nonlinearity, performs better than a logit model in predicting the timing of default events.
Keywords: Sovereign Debt, Default Risk, Maximum Simulated Likelihood Estimation
JEL Classification: C13, E43, F34, O11, O19
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