Cutting EdgE Sovereign Credit Risk in a Hidden Markov Regime- Switching Framework. Part 2

Potgieter, L. & Fusai, G. (2013). Cutting EdgE Sovereign Credit Risk in a Hidden Markov Regime- Switching Framework. Part 2. Journal of Financial Transformation, 38, pp. 67-81.

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Abstract

This research applies a discrete-time Markov-modulated model to default probability estimation and adapts it to Merton’s contingent claims approach, backing the hypothesis that a regime-switching framework which allows for structural shifts can substantially improve the underestimation of default probabilities associated with the Merton structural model. The modeling apparatus is applied to sovereign risk. proving that the methodology can be tractably extended to a contingent claims approach, and is investigated as a follow-up paper to an extensive methodology found in the previous edition of the Capco Journal of Financial Transformation (37) [Potgieter and Fusai (2013)]. CDS quotes are used to calibrate the regime switching model and are then used to estimate sovereign assets in both developed and emerging markets.

Item Type: Article
Additional Information: © 2013 The Capital Markets Company, N.V. All rights reserved. This journal may not be duplicated in any way without the express written consent of the publisher except in the form of brief excerpts or quotations for review purposes. Making copies of this journal or any portion there of for any purpose other than your own is a violation of copyright law. Permission to add this article to City Research Online has been granted by the publisher.
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/16975

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