Extracting Market-Implied Default Probabilities for Emerging Markets: An Intensity Framework

Hamza Demircan

CBT Research Notes in Economics from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: [EN] This study derives market-implied sovereign default probabilities for emerging market economies using an intensity-based reduced-form framework calibrated to sovereign credit default swap (CDS) spreads. Under a deterministic and piecewise-constant default intensity assumption, the model recovers survival and forward (conditional) default probabilities consistent with risk-neutral valuation, yielding a forward-looking term structure of sovereign credit risk. Empirical findings indicate that the term structure of implied default probabilities is generally upward sloping and that default probabilities rise during stress episodes, when the term structure may flatten or temporarily invert before normalizing. In addition, a decomposition framework is applied to Türkiye to examine the relationship between short-term default risk and a global factor extracted from other emerging market economies. The results indicate that the explanatory power of the global factor weakens over time, with a larger share of Türkiye’s default-risk variation remaining unexplained by the global factor, particularly in the post-2018 period, although the divergence narrows more recently during a period of tighter macroeconomic policy. Overall, the framework provides an approach for extracting forward-looking measures of sovereign credit risk, while the decomposition analysis provides information on sovereign risk dynamics in Türkiye. [TR] Bu calisma, gelismekte olan ulkeler icin ulke kredi temerrut takasi (CDS) farklarina kalibre edilmis yogunluk temelli indirgenmis form cercevesi kullanarak piyasa tarafindan ima edilen temerrut olasiliklarini turetmektedir. Deterministik ve kesikli sabit bir temerrut yogunlugu varsayimi altinda model, risk-notr degerleme ile uyumlu sagkalim ve ileriye donuk (kosullu) temerrut olasiliklarini elde ederek ulke kredi riskinin ileriye donuk vade yapisini olusturmaktadir. Ampirik bulgular, ima edilen temerrut olasiliklarinin vade yapisinin genel olarak yukari egimli oldugunu ve stres donemlerinde temerrut olasiliklarinin tum vadelerde artmasiyla egrinin yataylasabildigini veya gecici olarak tersine donebildigini, piyasa kosullarinin normallesmesiyle birlikte ise yeniden diklestigini gostermektedir. Buna ek olarak, Turkiye’nin kisa vadeli temerrut riski ile diger gelismekte olan ekonomilerin temerrut riski verilerinden elde edilen kuresel faktor arasindaki iliskiyi incelemek amaciyla bir ayristirma cercevesi uygulanmaktadir. Sonuclar, kuresel faktorun aciklayiciliginin zaman icerisinde zayifladigini ve ozellikle 2018 sonrasi donemde Turkiye’nin temerrut riskindeki degisimin daha buyuk bir bolumunun kuresel faktor tarafindan aciklanamadigini gostermektedir. Ancak 2024 yili sonrasinda daha siki bir makroekonomik politika cercevesiyle birlikte kuresel faktorle olan ayrismanin kismen azaldigi gorulmektedir. Genel olarak, bu cerceve ulke kredi riskine iliskin ileriye donuk gostergelerin elde edilmesine yonelik bir yaklasim sunarken, ayristirma analizi Turkiye’deki ulke risk dinamiklerine iliskin bilgi saglamaktadir.

Date: 2026
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