Conditional Sovereign Transition Probability Matrices

Perilioglu, Ahmet; Tuysuz, Sukriye

doi:10.1016/s2212-5671(15)01283-6

Cited by 5 publications

(4 citation statements)

References 19 publications

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“…In compliance with the findings of this article, empirical results have proven that sovereign rating is a well applicable, complex, forward-looking measure of credit risk, and provides important input to sovereign portfolio risk management as shown inter alia in earlier empirical studies by Cantor and Packer (1996), Hu et al (2002), Wei (2003), Kiefer and Larson (2004), Altman and Rijken (2004), Perilioglu and Tuysuz (2015), Seetharaman et al (2017), Kleszcz andNehrebecka (2020), andde Oliveira et al (2021).…”

Section: Discussionsupporting

confidence: 75%

Sovereign Default Forecasting in the Era of the COVID-19 Crisis

Kristóf

2021

JRFM

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The COVID-19 crisis has revealed the economic vulnerability of various countries and, thus, has instigated the systematic exploration and forecasting of sovereign default risks. Multivariate statistical and stochastic process-based sovereign default risk forecasting has a 50-year developmental history. This article describes a continuous, non-homogeneous Markov chain method as the basis for a COVID-19-related sovereign default risk forecast model. It demonstrates the estimation of sovereign probabilities of default (PDs) over a five-year horizon period with the developed model reflecting the impact of the COVID-19 crisis. The COVID-19-adopted Markov model estimates PDs for most countries, including those that are advanced with AAA and AA ratings, to suggest that no sovereign nation’s economy is secure from the financial impact of the COVID-19 pandemic. The dynamics of the estimated PDs are indicative of contemporary evidence as experienced in the recent financial crisis. The empirical results of this article have policy implications for foreign investors, sovereign lenders, export finance institutions, foreign trade experts, risk management professionals, and policymakers in the field of finance. The developed model can be used to timely recognize potential problems with sovereign entities in the current COVID-19 crisis and to take appropriate mitigating actions.

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Section: Discussionsupporting

confidence: 75%

Sovereign Default Forecasting in the Era of the COVID-19 Crisis

Kristóf

2021

JRFM

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“…The Markovian assumption is widely used in financial literature concerning credit rating dynamics (see e.g. [2], [4], [22], [24]), most of all being concerned with sovereign credit ratings (see e.g., [19], [20], [26] and [31]). In our model, the homogeneity property is limited to some sub-periods composing the time line.…”

Section: Modelling Rating and Credit Spread Dynamicsmentioning

confidence: 99%

“…(31) which gives us the second addendum of (26). The third addendum of ( 26) is symmetric with respect to the second one, we only need to exchange α and β .…”

Section: Covariance Between Countries' Total Credit Spreadmentioning

confidence: 99%

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A Copula-based Markov Reward Approach to the Credit Spread in the European Union

D’Amico

Petroni

Regnault

et al. 2019

Applied Mathematical Finance

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In this paper, we propose a methodology based on piecewise homogeneous Markov chain for credit ratings and a multivariate model of the credit spreads to evaluate the financial risk in European Union (EU). Two main aspects are considered: how the financial risk is distributed among the European countries and how large is the value of the total risk. The first aspect is evaluated by means of the expected value of a dynamic entropy measure. The second one is solved by computing the evolution of the total credit spread over time. Moreover, the covariance between countries' total spread allows understand any contagions in the EU. The methodology is applied to real data of 24 European countries for the three major rating agencies: Moody's, Standard & Poor's and Fitch. Obtained results suggest that both the financial risk inequality and the value of the total risk increase over time at a different rate depending on the rating agency and that the dependence structure is characterized by a strong correlation between most of European countries.

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