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Pricing sovereign credit risk of an emerging market

Gonzalo Camba-Mendez, Dobromił Serwa (), Konrad Kostrzewa and Anna Marszal

No 1924, Working Paper Series from European Central Bank

Abstract: We analyze the market assessment of sovereign credit risk in an emerging market using a reduced-form model to price the credit default swap (CDS) spreads thus enabling us to derive values for the probability of default (PD) and loss given default (LGD) from the quotes of sovereign CDS contracts. We compare different specifications of the models allowing for both fixed and time varying LGD, and we use these values to analyze the sovereign credit risk of Polish debt throughout the recent global financial crisis. Our results suggest the presence of a low LGD and a relatively high PD for Poland during the crisis. The highest PD is in the months following the collapse of Lehman Brothers. The derived measures of sovereign risk are strongly linked with the level of public debt and with another measure of PD from a structural model. Correlations between our PD values and the CDS spreads heavily depend on the maturity of the sovereign CDS. JEL Classification: C11, C32, G01, G12, G15

Keywords: CDS spreads; loss given default; Poland; probability of default; sovereign credit risk (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-ger, nep-rmg and nep-tra
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Citations: View citations in EconPapers (1)

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Working Paper: Pricing sovereign credit risk of an emerging market (2014) Downloads
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