Credit Exposure and Sovereign Risk Analysis: The Case of South America
Frontiers in Finance and Economics, Vol. 1, pp. 46-56, 2004
Posted: 30 Mar 2005
This study makes use of a panel data framework to identify the economic signals that shape the debt repayment behaviour of the South American region. The paper employs a logit estimator with the endogenous variable based on country specific thresholds of default. A stepwise general to specific methodology is applied to identify the set of economic variables employed. The results indicate the stronger influence of domestic, rather than international, financial factors in determining default. The forecasting ability of the proposed estimator is evaluated through a cumulative three-year rolling prediction. Although the performance of the model seems satisfactory, the empirical findings indicate an upward bias signalling a possible type II error.
Keywords: Financial crises, Sovereign default, Logit modelling, Forecasting credit risk.
JEL Classification: F34, G15, G21
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