Sovereign Credit Risk with Endogenous Default

This paper provides, and empirically estimates, a model of sovereign default risk on external debt,in which the sovereign endogenously determines the timing of defaulting. The paper o¤ers theoreticalpredictions of the relationship between credit spreads and related macro-variables that are consistentwith the empirical literature. The contribution of the model is the transformation of the highly non-linear relationship between observed EMBI+ spreads and sovereign revenues, computed with quarterlyaccounting data or daily stock market prices, into a linear relationship betwen the spreads predicted bythe model and EMBI+ spreads.[...]

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Year of publication:	2008-07-28
Authors:	Jeanneret, Frédéric A.
Institutions:	Swiss National Centre of Competence in Research North South <Bern>
Subject:	Kreditmarkt \| Kreditrisiko \| Verhandlung

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1 Introduction
2 A theory of sovereign default
2.1 Assumptions of the model
2.2 Sovereign debt pricing
2.3 Sovereign market value
2.4 Default boundary
2.5 Credit spread
3 Theoretical predictions and analysis
3.1 Determinants of credit risk
4 An application of the model on EMBI+ data
4.1 Empirical methodology
4.2 Empirical specication
4.3 EMBI+ spreads and predicted credit spreads with accounting data
4.4 EMBI+ spreads and predicted credit spreads with market prices
5 Conclusion
References
6 Appendix<br<6.1 Model with endogenous recovery rate and level of debt
6.2 Robustness analysis of the empirical section

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