A Simple Approach to Country Risk

Lehrbass, Frank

doi:10.1007/978-1-4612-1214-0_3

Cited by 15 publications

(4 citation statements)

References 19 publications

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“…Structural models are more appropriate for modeling credit risk of firms as the value of firms' assets can be identified through data sources such as balance sheets. On the other hand, the sovereigns' value of assets is a vaguer concept, although there are attempts in the literature, such as Lehrbass (2000), to approximate it with stock market value. Additionally, a structural model might become complex for a portfolio including many entities since it requires identifying the linkages among the entities in terms of their exposure to different risk factors.…”

Section: A Brief Overview Of the Literaturementioning

confidence: 99%

Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?

Cevik

Öztürkkal

2021

International Finance

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This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 countries. Using annual data over 2004–2020, we find that infectious‐disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, a granular analysis using high‐frequency data indicates that the COVID‐19 pandemic has had a significant impact on CDS spreads. This adverse effect appears to be more pronounced in advanced economies, which may reflect the greater severity of the pandemic and depth of the economic crisis in these countries, at least during the initial stage of the outbreak, as well as underreporting in developing countries due to differences in testing availability and institutional capacity. While more stringent containment measures help lower sovereign CDS spreads, the fiscal burden of these efforts could undermine credit worthiness and eventually push the cost of borrowing higher.

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Section: A Brief Overview Of the Literaturementioning

confidence: 99%

Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?

Cevik

Öztürkkal

2021

International Finance

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“…In an ex ante default event at time t > t, the price P(t, t|b) of a risky coupon bond at time t is given by Equation (3), where all the cash flows c i for i < t are totally paid. After the default event, the creditors receive a fraction b of an identical but risk-free bond: • where r t is the term structure of the risk-free interest rate at time t. 6 We follow Lehrbass [1999] and adopt Moody's assumption about the recovery rate for high-risk obligations, choosing b equal to 40% as a plausible estimate. 7 Let p(t|y t , l t , s, a) be the default probability in each time period t > t. The price of a risky coupon bond P t is given by Equation (4), which represents the expected present value of every coupon's payments during the lifetime of the bond, considering the default probability of those payments, plus a random term that includes all other influences.…”

Section: Structural Modelmentioning

confidence: 99%

“…Lehrbass [1999] uses an equity index of the borrower country expressed in foreign currency as the default index. Wiggers [2002] adopts the domestic output in foreign currency, and follows the Leland [1994] approach of optimal endogenous default.…”

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confidence: 99%

Two-Factor Structural Model of Determinants of Brazilian Sovereign Risk

Moreira¹,

Rocha²

2004

JFI

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“…Martins [1997] uses the default risk premium implied from U.S. speculative long-term corporate bonds to price Brady bonds. Lehrbass [1999] develops a structural model based on an equity index of the borrower country expressed in the lender's foreign currency to analyze DM-Eurobonds issued by emerging economies. Hui and Lo [2003] present a structural model based on foreign exchange rates to explain sovereign spreads in South Korea and Brazil.…”

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confidence: 99%