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Title:Sovereign risk in a structural approach: Evaluating sovereign ability-to-pay and probability of default PDF Logo
Authors:Karmann, Alexander
Maltritz, Dominik
Issue Date:2003
Series/Report no.:Dresden discussion paper in economics 07/03
Abstract:We quantify the probability that a sovereign defaults on repayment obligations in foreign currency. Adopting the structural approach as first introduced by Merton, we consider the sovereigns ability-to-pay, characterised by the sum of discounted future payment surpluses, as the underlying process. Its implicit volatility is inferred from market spreads. We demonstrate for the case of Latin America and Russia that our approach indicates default events well in advance of agencies and markets.
Subjects:Sovereign Risk
Probability of Default
JEL:F34
Document Type:Working Paper
Appears in Collections:Dresden Discussion Paper Series in Economics, Faculty of Business and Economics, TU Dresden

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