Front Matter Page
International Capital Markets Department
Authorized for distribution by carlos medeiros
Contents
I. Introduction
II. A Practical Approach to Sovereign Risk
A. Defining Sovereign Distress: The Concept
B. Estimating the Value of Sovereign Assets
III. Contingent Claims Analysis of the Sovereign Balance Sheet
A. Consolidating the Sovereign Balance Sheet
B. Seniority of Consolidated Balance Sheet Liabilities
C. Calculating Implied Sovereign Asset Value and Volatility
IV. Sovereign Credit Risk Indicators
V. Robustness of Sovereign Credit Risk Indicators
A. Correlation with Market Data
B. Regression Analysis
VI. Scenario and Simulation Analysis: Hypothetical Sovereign
A. The Baseline
B. Scenario Analysis
C. Monte Carlo Simulations
D. Evaluating Policy Design
VII. Next Steps
A. A Robust Framework for Reserve Management
B. A Robust Framework for Debt Sustainability
VIII. Conclusions
Boxes
1. From Corporate to Sovereign Risk Analysis
2. Implementing the Monte Carlo Simulation
Figures
1. Distribution of Sovereign Asset Value and the Distress Barrier
2. Segregated Balance Sheets of the Government and Monetary Authority
3. The Consolidated Contingent Claims Public Sector Balance Sheet
4. Distance to Distress and Credit Default Swaps
5. Model Credit Spread and J.P. Morgan EMBI+ Country Index
6. Market Observed Spreads and Model Distance to Distress
7. Monte Carlo Simulations: Hypothetical Sovereign
8. Evaluation of Policy Options
Tables
1. Spearman Rank Correlation: Sovereign Risk Indicators and Actual Data
2. Regression Output: Risk-Neutral Spreads and CDS Spreads
3. Regression Output: Risk-Neutral Spreads and EMBI+ Spreads
4. Regression Output: Default Probability
5. Example Contingent Claims Sovereign Balance Sheet Risk Indicators
6. Alternative Scenarios and Contingent Claim Sovereign Balance Sheet Risk Indicators
Appendix
Black-Scholes Option Pricing Formula in Contingent Claim Anaylsis
A. Implied Sovereign Asset Value and Volatility
B. Probability of Default and Sovereign Risk Premium
C. Extensions to Multiple Layer of Liabilities
References