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Finance

2011/2 (Vol. 32)


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Previous Pages 137 - 165

Abstract

English

This article studies sovereign credit spreads using a contingent claims model and a balance sheet representation of the sovereign economy. Analytical formulae for domestic and external debt values as well as for the financial guarantee are derived in a framework where recovery rate is endogenously determined as the solution of a strategic bargaining game. The approach allows to relate sovereign credit spreads to observable macroeconomic factors, and in particular accounts for contagion effects through the corporate and banking sectors. Pricing performance as well as predictions about credit spread determinants are successfully tested on the Brazilian economy.

Outline

  1. Introduction
  2. The sovereign economy with contagion effects
    1. Contingent claims analysis
      1. Notations and assumptions
      2. Valuation
    2. The debt renegotiation game
  3. Numerical analysis
    1. Model calibration
    2. Determinants of sovereign credit spreads
  4. Case study of the Brazilian economy
    1. Volatility estimation
    2. Pricing performance
    3. Regression analysis
  5. Conclusion

To cite this article

Pascal François, Georges Hübner, Jean-Roch Sibille, “ A Structural Balance Sheet Model of Sovereign Credit Risk ”, Finance 2/2011 (Vol. 32) , p. 137-165
URL : www.cairn.info/revue-finance-2011-2-page-137.htm.

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