The sovereign default puzzle: Modelling issues and lessons for Europe

Daniel Cohen and Sébastien Villemot

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Abstract: Why do countries default? this seemingly simple question has yet to be adequately answered in the literature. Indeed, prevailing modelling strategies compel the to choose between two enappealing model features: depending on the cost of default selected by the modeler, either the debt ratios are too high and the probability of default is toot low or the opposite is true. In view of the historical evidence that countries always default is too low or crisis, we propose a novel approach to the theory of debt default and develop a model that matches the key stylized facts regarding sovereign risk.

Keywords: Sovereign debt; Lévy stochastic processes (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-eec
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00692038v1
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Working Paper: The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe (2012)
Working Paper: The sovereign default puzzle: Modelling issues and lessons for Europe (2012)
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