Expectations of risky bond payments are unobservable and recovery rates for sovereigns are hard to estimate because …

an approach to properly measure sovereign credit risk in a fixed-income portfolio. For that, we assume that CDS spreads … follow a SABR process and we derive a sovereign credit risk measure based on CDS spreads and duration of portfolio bonds. We …-budgeting approach is the most appropriate scheme to manage sovereign risk in bond portfolios and gives very appealing results with …