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Pricing sovereign credit risk of an emerging market

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

No 189, NBP Working Papers from Narodowy Bank Polski

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 period of a global financial crisis. Our results suggest the presence of a low LGD and a relatively high PD for Poland during a recent financial crisis. The highest PD is in the months following 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.

Keywords: sovereign credit risk; CDS spreads; probability of default; loss given default; Poland (search for similar items in EconPapers)
JEL-codes: C11 C32 G01 G12 G15 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-tra
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Working Paper: Pricing sovereign credit risk of an emerging market (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:189

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