Country Default Probabilities: Assessing and Backtesting

31 Pages Posted: 3 Mar 2007

See all articles by Stefan Huschens

Stefan Huschens

Dresden University of Technology - Faculty of Business and Economics

Alexander Karmann

Technische Universitaet Dresden

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management

Konstantin Vogl

Dresden University of Technology

Date Written: February 12, 2007

Abstract

We present statistical backtesting procedures applicable in situations where few and heterogeneous probabilities have to be evaluated, as is typically the case when forecasting country default risk. These tests are applied to a sample of default probabilities assessed for 19 emerging market and transition countries by estimating a Merton-type credit risk model using bond market data. For the estimation, we use a maximum likelihood technique based on time series of market data. Thereby, we avoid the drawbacks of alternative approaches commonly used in the literature.

Keywords: Sovereign default, Country risk, Default probability, Likelihood ratio test, Backtesting

JEL Classification: C12, C53, F34, G33

Suggested Citation

Huschens, Stefan and Karmann, Alexander and Maltritz, Dominik and Vogl, Konstantin, Country Default Probabilities: Assessing and Backtesting (February 12, 2007). Available at SSRN: https://ssrn.com/abstract=965701 or http://dx.doi.org/10.2139/ssrn.965701

Stefan Huschens

Dresden University of Technology - Faculty of Business and Economics ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Alexander Karmann (Contact Author)

Technische Universitaet Dresden ( email )

Muenchner Platz 1- 3
Dresden, 01069
Germany

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Konstantin Vogl

Dresden University of Technology ( email )

Köln, 50674
Germany
+49-177-544.2168 (Phone)

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