Risk Management Optimization for Sovereign Debt Restructuring

Andrea Consiglio () and Stavros Zenios

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: Debt restructuring is gaining acceptance as a policy tool for resolving sovereign debt crises. In this paper we propose a scenario analysis for debt sustainability and integrate it with scenario optimization for the risk management of re-profiling sovereign debt. The scenario dynamics of debt are used to define a risk metric--conditional Debt-at-Risk--for the tail of debt-to-GDP ratios, and a multi-period stochastic programming model optimizes the expected cost of financing a debt structure, subject to limits on the risk. The model handles important technical aspects of debt restructuring: it collects all debt issues in a common framework, and can include embedded options and contingent claims, multiple currencies and step-up or linked contractual features. Alternative debt profiles are then analyzed for their cost vs risk tradeoffs. With a suitable re-calculation of the efficient frontier, debt sustainability of a given debt profile can then be ascertained. The model is applied to two stylized examples drawn from an IMF publication and from the Cyprus debt crisis.

Date: 2014-08
New Economics Papers: this item is included in nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://fic.wharton.upenn.edu/fic/papers/14/p1410.html
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fic.wharton.upenn.edu/fic/papers/14/p1410.html [301 Moved Permanently]--> https://wifpr.wharton.upenn.edu/fic/papers/14/p1410.html)

Related works:
Journal Article: Risk Management Optimization for Sovereign Debt Restructuring (2015)
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:ecl:upafin:14-10

Access Statistics for this paper

More papers in Working Papers from University of Pennsylvania, Wharton School, Weiss Center Contact information at EDIRC.
Bibliographic data for series maintained by ().