Forecasting Sovereign default risk with Merton's model

J Duyvesteyn, MPE Martens

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Scopus)

Abstract

Merton's structural model for sovereigns is proven to be useful to analyze the default risk of a country. We are the first to investigate how fast CDS spreads react to changes in model inputs and outputs. CDS spread changes strongly correlate with exchange rate returns, which are an input to the model. But CDS spread changes on average react with a delay to changes in model outputs such as the distance to default, the default probability and model spreads. Hence contingency claim analysis for sovereigns provides useful predictions for CDS spreads.
Original languageEnglish
Pages (from-to)58-71
Number of pages14
JournalThe Journal of Fixed Income
Volume25
Issue number2
DOIs
Publication statusPublished - 2015

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