Multivariate Sovereign Risk Modeling : Modeling Sovereign Bond Yield and Credit Default Swap Spreads in Parametric and Non-Parametric Frameworks

摘要

The worldwide financial crisis of 2008 has shaken the very foundations of modern financialtheory, which rested on the hypothesis that financial markets were efficient.Since markets have been inconsistently pricing sovereign risk, recent studies suggeststhat there may be “multiple equilibria” between sovereign risk prices and underlyingfundamentals. As a consequence, scientific papers focus on analyzing government riskand its determinants. For this purpose, most studies employed parametric models in orderto examine the impact of variables on sovereign risk. However recent scientificstudies suggest that these parametric models are not an appropriate approach to modelthe non-linear dynamics of sovereign risk markets.In this study there are two different modeling techniques applied in order to verifywhether non-parametric models estimate sovereign risk measures more accuratelythan parametric models. Moreover, it is aimed to expose indications of multiple equilibriaon the European sovereign risk markets based on an ex-post analysis.In order to evaluate estimation accuracy and explanatory power of parametricand non-parametric models, there are 16 different European sovereigns assessed by regardingan estimation error indicator. Indications of multiple equilibria are exposed byfocusing on dynamics of determinants and with respect to the individuality of Europeansovereigns. For this purpose, we employed a three-stage panel data analysis.The empirical results revealed complex and dynamic European sovereign riskmarkets. We found that non-parametric models generally connect more accurately underlyingfundamentals to actual spreads than generic parametric models, even thoughqualitatively are both models similar. The dynamics of sovereign risk markets is manifestedin alternating sensitivity of certain fundamentals as well as in time-varying riskdeterminants, which indicates an inconsistent perception of the market equilibria. Finally,we found that market participants distinguish consciously the geographical affiliationof a sovereign by charging discernible risk premium.The empirical results suggest that since global financial crisis debt-related macrovariables have been gaining in importance. In particular, we found in combination withhigh unemployment rate countries reflect high likelihood of default. This finding mayprovide valuable early warning signals to countries that move towards dangerous riskpaths.