Forecasting sovereign default using panel models: A comparative analysis (original) (raw)
Related papers
2010
This paper uses model averaging techniques to identify robust predictors of sovereign default episodes on a pooled database for 46 emerging economies over the period 1980-2004. Sovereign default episodes are defined according to Standard & Poor s or by non-concessional International Monetary Fund loans in excess of 100 percent of the country s quota. The authors find that, in addition to the level of indebtedness, the quality of policies and institutions is the best predictor of default episodes in emerging market countries with relatively low levels of external debt. For emerging market countries with a higher level of debt, macroeconomic stability plays a robust role in explaining differences in default probabilities. The paper provides evidence that model averaging can improve out-of-sample prediction of sovereign defaults, and draws policy conclusions for the current crisis based on the results.
Early warning systems for sovereign debt crises: The role of heterogeneity
Computational statistics & data analysis (2006) 51, 1420-1441
Sovereign default models that differ in their treatment of unobservable country, regional and time heterogeneities are systematically compared. The analysis is based on annual data over the 1983–2002 period for 96 developing economies. Inference-based criteria and parameter plausibility overwhelmingly favour more complex models that allow the link between the probability response and the fundamentals to vary over time and across countries. However, out-of-sample forecast evaluation using several loss functions and equal-predictive-ability tests suggests that simplicity beats complexity. Parsimonious pooled logit models produce the most accurate sovereign default forecasts and outperform the naive benchmarks.
A Note on Causality between Debt and Sovereign Credit Ratings using Panel Tests
2011
This paper uses linear and nonlinear panel causality tests to empirically explore the direction of causality between external debt stocks and credit ratings for a group of developing countries over the period 1998 to 2008. The results indicate that for the vast majority of the countries in the panel, a bi-directional causal relationship between external debt and sovereign ratings is
Fitting and Forecasting Sovereign Defaults Using Multiple Risk Signals
Social Science Research Network, 2011
In this article, we try to realize the best compromise between in-sample goodness of fit and out-of-sample predictability of sovereign defaults. To do this, we use a new regressiontree based approach that signals impending sovereign debt crises whenever pre-selected indicators exceed specific thresholds. Using data from emerging markets and Greece, Ireland, Portugal and Spain (GIPS) over the period 1975-2010, we show that our model significantly outperforms existing competing approaches (logit, stepwise logit, noiseto-signal ratio and regression trees), while balancing in-and out-of-sample performance. Our results indicate that illiquidity (high short-term debt to reserves) and default history, together with real GDP growth and US interest rates, are the main determinants of both emerging market country defaults and the recent European sovereign debt crisis.
Predicting sovereign debt crises: An Early Warning System approach
Journal of Financial Stability, 2017
In light of the renewed challenge to construct effective "Early Warning Systems" for sovereign debt crises, we empirically evaluate the predictive power of econometric models developed so far across developed and emerging country regions. We propose a different specification of the crisis variable that allows for the prediction of new crisis onsets as well as duration, and develop a more powerful dynamic-recursive forecasting technique to generate more accurate out-of-sample warning signals of sovereign debt crises. Our results are shown to be more accurate compared to the ones found in the existing literature.
The determinants of sovereign default: A sensitivity analysis
International Review of Economics & Finance, 2014
A vast and growing empirical literature aims at identifying key determinants of sovereign default. The literature is extensive and controversial. Can policy-makers use this body of research to learn anything that can help reduce the likelihood of sovereign default? We use a variant of Extreme Bound Analysis (EBA) to examine if any of the conclusions from the existing studies on the determinants of sovereign default is robust to small changes in the conditioning information set. Our EBA, spanning 190 countries over 1970-2010, upholds the robustness of the observed association between sovereign default and credit worthiness, growth, leverage on export earnings, debt service ratio, reserves, inflation, exchange rate, trade deficit, corruption, and democratic accountability. At the same time, our EBA reveals that the correlations between sovereign default and several of the controversial variables (namely, openness, central bank liabilities, interest payments, cost of borrowing, imports, exports, per capita GNP, and government stability) are highly sensitive to small alterations in the conditioning information set.
The elusive costs of sovereign defaults
Journal of Development Economics, 2011
Few would dispute that sovereign defaults entail significant economic costs, including, most notably, important output losses. However, most of the evidence supporting this conventional wisdom, based on annual observations, suffers from serious measurement and identification problems. To address these drawbacks, we examine the impact of default on growth by looking at quarterly data for emerging economies. We find that, contrary to what is typically assumed, output contractions precede defaults. Moreover, we find that the trough of the contraction coincides with the quarter of default, and that output starts to grow thereafter, indicating that default episode seems to mark the beginning of the economic recovery rather than a further decline. This suggests that, whatever negative effects a default may have on output, those effects result from anticipation of a default rather than the default itself. * We would like to thank Eduardo Cavallo and other participants in the December 2005 IPES pre-conference, and we wish to thank Mariano Alvarez for excellent research assistance. The views expressed in this paper are the authors' and do not necessarily reflect those of the Inter-American Development Bank.
Relationship between Stock and the Sovereign CDS markets: A panel VAR based analysis
South Asian Journal of Management Sciences
This study explores the relationship between the Stock and the Sovereign Credit Default Swaps (SCDS) markets by using dataset of 36 countries.We apply Panel Vector Autoregressive (PVAR) model to gauge the impact of one market's shocks to the other. Our results decipher that changes in stock market returns explain the significant portion of the SCDS market spreads' changes. Furthermore, the magnitude of this explanation is linked with the volatility of the SCDS market. These analyses indicate that the firsthand information about the country's sovereign credit risk is contained in the respective stock market, and can be used by participants/investors to predict the SCDS market spreads.
F Determinants of sovereign bond yields in emerging economies : Some panel inferences Sri
2016
In the backdrop of international financial crisis, debt markets across the globe became highly volatile, highly contagious and posed a high risk to advanced as well as emerging economies. In this regard, the study tries to identify the proximate determinants of sovereign bond yields in emerging economies from 1980 to 2013. The empirical results of Pedroni panel cointegration tests and dynamic ordinary least squares tests show that the factors like exchange rate, federal reserve rate, oil price, US bond yield, gold price and real interest rate are the proximate determinants of the emerging economies' bond yields.
Sovereign Debt: A Quantitative Comparative Investigation of the Partial Default Mechanismú
2019
We quantitatively explore the implications of the partial default mechanism for the dynamics of sovereign debt and default in a small open economy. The model features endogenous partial default and preemptive recovery on the defaulted amount with direct utility cost of default, instead of the exclusion from international financial markets. The model is calibrated to Argentina and compared to the traditional full default models. We show that with our partial default framework, (1) the model with endowment not only matches the mean spread on debt and the debt-to-output ratio, like the traditional models, but also matches both the default frequency and the default rate; (2) the model with production, with investment as another margin to smooth consumption, improves the fit with data for the volatilities of consumption and spread on debt as well as the debt service-to-output ratio (without significant change in other moments), partially o setting the weak performance of the endowment mo...