A Ratings-Based Approach to Measuring Sovereign Risk

International Journal of Finance and Economics, 2008, vol. 13, no. 1, pp. 26-39

26 Pages Posted: 15 Feb 2007 Last revised: 21 May 2015

See all articles by Eli M. Remolona

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department

Michela Scatigna

Bank for International Settlements (BIS)

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: January 1, 2007

Abstract

We propose a new approach to measuring sovereign default risk. We use sovereign credit ratings and historical default rates provided by credit rating agencies to construct a measure of ratings implied expected loss. We compare our measure of expected loss from sovereign defaults with stand-alone credit ratings and also examine its relationship with credit default swap spreads. We show that our measure is more informative for measuring sovereign risk. We re-examine the fundamental determinants of sovereign risk and find further evidence to support the debt intolerance and original sin explanations for country risk. This study contributes an improved understanding of the value of sovereign credit rating teams in assessing the long-term country risks accompanying emerging market investments.

Keywords: Sovereign credit ratings, country risk, expected loss, sovereign debt, emerging markets

JEL Classification: G15, F34

Suggested Citation

Remolona, Eli M. and Scatigna, Michela and Wu, Eliza, A Ratings-Based Approach to Measuring Sovereign Risk (January 1, 2007). International Journal of Finance and Economics, 2008, vol. 13, no. 1, pp. 26-39, Available at SSRN: https://ssrn.com/abstract=963041 or http://dx.doi.org/10.2139/ssrn.963041

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

IFC 2 Bldg, 78/F
Central
Hong Kong
Hong Kong
+852 2982 7150 (Phone)
+852 2982 7123 (Fax)

Michela Scatigna

Bank for International Settlements (BIS) ( email )

Basel, 4002
Switzerland

Eliza Wu (Contact Author)

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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