Chapter 24. Measuring and Analyzing Sovereign Risk with Contingent Claims
  • 1 0000000404811396 Monetary Fund


This chapter develops a comprehensive new framework to measure and analyze sovereign risk. Given that traditional macroeconomic vulnerability indicators and accounting-based measures do not address risk in a comprehensive and forward-looking way, the contingent claims approach is used to construct a marked-to-market balance sheet for the sovereign and derive a set of credit risk indicators that serve as a barometer of sovereign risk. Applications to 12 emerging market economies show the risk indicators to be robust and highly correlated with market spreads. The framework can help policymakers design risk mitigation strategies and rank policy options using a calibrated structural model unique to each economy.

Contributor Notes

This chapter was previously published in IMF Staff Papers (2008), Vol. 55, No. 1, pp. 113—48 (Gapen and others, 2008). The authors would like to thank Zvi Bodie, Robert Merton, Linda Tesar, and participants of the JP Morgan Chase seminars at the 2005 Annual Meetings of the Inter-American Development Bank in Okinawa and the Asian Development Bank in Istanbul, as well as of the Institute of International Finance Country Risk Workshop, for their comments and useful discussions. The authors also are grateful to Hung Tran, Eliot Kalter, Carlos Medeiros, and participants of the IMF Research Department seminar for their comments.
Author: Ms. Li L Ong