Measuring sovereign credit risk using a structural model approach

Han-Hsing Lee (), Kuanyu Shih () and Kehluh Wang ()
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Han-Hsing Lee: National Chiao Tung University
Kuanyu Shih: National Chiao Tung University
Kehluh Wang: National Chiao Tung University

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 4, No 9, 1097-1128

Abstract: Abstract In this paper, we use three structural models to investigate a country’s credit risk by applying it to a sovereign balance sheet. The transformed-data maximum likelihood estimation method and the maximization–maximization algorithm are adopted for model calibration. The derived probability of default over time for four sample countries matched well with the events and economic conditions that occurred during the sample period. Our empirical analyses show that structural models can be used to determine with high accuracy whether the credit of a sovereign country is in a precarious situation. We then illustrate how the structural approach can be an effective tool to monitor the sovereign credit risk.

Keywords: Sovereign credit risk; Structural model; Default probability; CDS (search for similar items in EconPapers)
JEL-codes: G01 G13 G32 G33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-015-0532-2

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