Measuring and Analyzing Sovereign Risk with Contingent Claims

50 Pages Posted: 3 Mar 2006

See all articles by Michael Gapen

Michael Gapen

International Monetary Fund (IMF) - International Capital Markets Department

Dale F. Gray

International Monetary Fund (IMF); MF Risk

Cheng Hoon Lim

International Monetary Fund (IMF)

Yingbin Xiao

International Monetary Fund (IMF)

Date Written: August 2005

Abstract

This paper develops a comprehensive new framework to measure and analyze sovereign risk. Since traditional macroeconomic vulnerability indicators and accounting-based measures do not address risk in a comprehensive and forward-looking way, the contingent claims approach is used to construct a marked-to-market balance sheet for the sovereign, and derive a set of credit-risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the risk indicators to be robust and highly correlated with market spreads. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy.

Keywords: Sovereign risk, contingent claims, debt sustainability, risk management

JEL Classification: E61, G13, G15, H63

Suggested Citation

Gapen, Michael and Gray, Dale F. and Lim, Cheng Hoon and Xiao, Yingbin, Measuring and Analyzing Sovereign Risk with Contingent Claims (August 2005). IMF Working Paper No. 05/155, Available at SSRN: https://ssrn.com/abstract=888024

Michael Gapen (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Dale F. Gray

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

MF Risk

5921 Searl Terrace
Bethesda, MD 20816

Cheng Hoon Lim

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yingbin Xiao

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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