Value-at-Risk for Country Risk Ratings

Michael McAleer, Bernardo da Veiga and Suhejla Hoti ()

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: The country risk literature argues that country risk ratings have a direct impact on the cost of borrowings as they reflect the probability of debt default by a country. An improvement in country risk ratings, or country creditworthiness, will lower a country’s cost of borrowing and debt servicing obligations, and vice-versa. In this context, it is useful to analyse country risk ratings data, much like financial data, in terms of the time series patterns, as such an analysis would provide policy makers and the industry stakeholders with a more accurate method of forecasting future changes in the risks and returns of country risk ratings. This paper considered an extension of the Value-at-Risk (VaR) framework where both the upper and lower thresholds are considered. The purpose of the paper was to forecast the conditional variance and Country Risk Bounds (CRBs) for the rate of change of risk ratings for ten countries. The conditional variance of composite risk returns for the ten countries were forecasted using the Single Index (SI) and Portfolio Methods (PM) of McAleer and da Veiga [10,11]. The results suggested that the country risk ratings of Switzerland, Japan and Australia are much mode likely to remain close to current levels than the country risk ratings of Argentina, Brazil and Mexico. This type of analysis would be useful to lenders/investors evaluating the attractiveness of lending/investing in alternative countries.

Keywords: Country risk; risk ratings; value-at-risk; risk bounds; risk management (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-05-01
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://repec.canterbury.ac.nz/cbt/econwp/1029.pdf (application/pdf)

Related works:
Journal Article: Value-at-Risk for country risk ratings (2011)
Working Paper: Value-at-Risk for Country Risk Ratings (2009)
Working Paper: Value-at-Risk for Country Risk Ratings (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:10/29

Access Statistics for this paper

More papers in Working Papers in Economics from University of Canterbury, Department of Economics and Finance Private Bag 4800, Christchurch, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Albert Yee ().