Joint default probabilities and sovereign risk

Bert Scholtens*, Daphne Hameeteman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

The assessment of sovereign risk is of crucial importance for international lenders and investors. Many existing sovereign risk approaches are opaque and heavily rely on subjective choices. In general, they lack a theoretical basis. To assess sovereign risk, we use the Merton model in which a loan defaults if the value of a firm's assets falls below the value of its debt. In a portfolio context, this implies that default correlations warrant the utmost attention. We analyze defaults for 37 countries during the period 1970-1998. We find that sovereign default correlations are low. Joint defaults are highest in Central and Eastern Europe. They are intermediate in Latin America and they are low in (Southeast) Asia.

Original languageEnglish
Pages (from-to)195-210
Number of pages16
JournalInternational Interactions
Volume33
Issue number2
DOIs
Publication statusPublished - Apr 2007

Keywords

  • Capital markets
  • Default
  • Finance
  • Foreign exchange reserves
  • Methods
  • Sovereign risk

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