Model-Based Estimation of Sovereign Default Risk

38 Pages Posted: 23 Oct 2017 Last revised: 6 May 2018

Inci Gumus

Sabanci University

Junko Koeda

Waseda University - Graduate School of Economics; Waseda University - School of Political Science and Economics

Date Written: May 1, 2018

Abstract

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

Suggested Citation

Gumus, Inci and Koeda, Junko, Model-Based Estimation of Sovereign Default Risk (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=3056539 or http://dx.doi.org/10.2139/ssrn.3056539

Inci Gumus

Sabanci University ( email )

Junko Koeda (Contact Author)

Waseda University - Graduate School of Economics ( email )

1-6-1 Nishi-waseda, Shinjuku-ku
Tokyo
Japan

Waseda University - School of Political Science and Economics ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050, Tokyo 169-8050
Japan

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