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Constructing an accurate yield curve is essential for evaluating financial instruments and analyzing market trends in the bond market. However, in the case of the Burundian sovereign bond market, the presence of missing data poses a significant challenge to accurately constructing the yield curve. In this paper, we explore the limitations and data availability constraints specific to the Burundian sovereign market an…
This paper analyses the Chinese Sovereign bond yield to find out the principal factors affecting the term structure of interest rate changes. We apply Principal Component Analysis (PCA) on our data consisting of the Chinese Sovereign bond from January 2002 till May 2018 with the different yield to maturity. Then we will discuss the multi-factor immunization model (method on hedging market risk) on a bond portfolio.
In this paper, we examine the materiality of ESG on country creditworthiness from a credit risk and fundamental analysis viewpoint. We first determine the ESG indicators that are most relevant when it comes to explaining the sovereign bond yield, after controlling the effects of traditional fundamental variables such as economic strength and credit rating. We also emphasize the major themes that are directly useful f…
We develop a pricing model for Sovereign Contingent Convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's Credit Default Swap (CDS) spread. We model CDS spread regime switching, which is prevalent during crises, as a hidden Markov process, coupled with a mean-reverting stochastic process of spread levels under fixed regimes, in order to obtain S-CoCo prices through simulation. The paper uses …
The primary objective of this study was to examine the impact of the US sovereign credit rating downgrade on its equity market. Utilizing the event study methodology, a sample of three most capitalized listed companies -- Microsoft, Apple, and Amazon -- and the equity market index -- S&P500 -- were used as the proxy for the overall equity market. Three market models were constructed within the estimation window to de…
Sovereign credit ratings summarize the creditworthiness of countries. These ratings have a large influence on the economy and the yields at which governments can issue new debt. This paper investigates the use of a Multilayer Perceptron (MLP), Classification and Regression Trees (CART), Support Vector Machines (SVM), Naïve Bayes (NB), and an Ordered Logit (OL) model for the prediction of sovereign credit ratings. We …
We explore the interplay between sovereign debt default/renegotiation and environmental factors (e.g., pollution from land use, natural resource exploitation). Pollution contributes to the likelihood of natural disasters and influences economic growth rates. The country can default on its debt at any time while also deciding whether to invest in pollution abatement. The framework provides insights into the credit spr…
ABSTRACT We model a loop between sovereign and bank credit risk. A distressed financial sector induces government bailouts, whose cost increases sovereign credit risk. Increased sovereign credit risk in turn weakens the financial sector by eroding the value of its government guarantees and bond holdings. Using credit default swap (CDS) rates on European sovereigns and banks, we show that bailouts triggered the rise o…
We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries.Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation.Sovereign credit spreads are generally more related to the U.S. stock and high-yield bond markets, global risk premia, and capital flo…
Abstract We provide new empirical evidence that U.S. expected growth and consumption volatility are closely related to the strong comovement in sovereign spreads. We rationalize these findings in an equilibrium model with recursive utility for credit default swap (CDS) spreads. The framework links a reduced-form default process with country-specific sensitivity to expected growth and macroeconomic uncertainty. Exploi…
The financial crisis and the ensuing recession have caused a sharp deterioration in public finances across advanced economies, raising investor concerns about sovereign risk. The concerns have so far mainly affected the euro area, where some countries have seen their credit ratings downgraded during 2009−11 and their funding costs rise sharply. Other countries have also been affected, but to a much lesser extent. Gre…
This paper develops an observed-data likelihood for applying moving-aggregate modified autoregressive (MAGMAR) copula time-series models to discrete sovereign rating-migration counts with time-varying exposure. An annual count identifies a probability-integral-transform interval rather than a unique latent point, so the likelihood integrates the latent process over the complete sequence of count intervals. A guided s…
This paper describes a discrete-time model of regularly-issued sovereign debt dynamics under a deficit-driven nominal debt growth regime that explicitly accounts for granular maturity. New issuance follows fixed allocations across a finite maturity ladder, and the government budget constraint determines total borrowing endogenously. In the deterministic baseline, we identify a sustainability condition for convergence…
Possible solution of problem of sovereign debts is suggested. At the current moment this solution still can be provided only by methods of the world monetary policy.
Several proposals for the reform of the euro area advocate the creation of a market in synthetic securities backed by portfolios of sovereign bonds. Most debated are the so-called European Safe Bonds or ESBies proposed by Brunnermeier, Langfield, Pagano,Reis, Van Nieuwerburgh and Vayanos (2017). The potential benefits of ESBies and other bond-backed securities hinge on the assertion that these products are really saf…
We show how bad and good volatility propagate through forex markets, i.e., we provide evidence for asymmetric volatility connectedness on forex markets. Using high-frequency, intra-day data of the most actively traded currencies over 2007 - 2015 we document the dominating asymmetries in spillovers that are due to bad rather than good volatility. We also show that negative spillovers are chiefly tied to the dragging s…
In this paper, we empirically study models for pricing Italian sovereign bonds under a reduced form framework, by assuming different dynamics for the short-rate process. We analyze classical Cox-Ingersoll-Ross and Vasicek multi-factor models, with a focus on optimization algorithms applied in the calibration exercise. The Kalman filter algorithm together with a maximum likelihood estimation method are considered to f…
In this paper, we search whether the Benford's law is applicable to monitor daily changes in sovereign Credit Default Swaps (CDS) quotes, which are acknowledged to be complex systems of economic content. This test is of paramount importance since the CDS of a country proxy its health and probability to default, being associated to an insurance against the event of its default. We fit the Benford's law to the daily ch…
Seigniorage is the real resources a sovereign (or a private issuer of money-like claims) obtains by issuing money whose production cost is below face value.
BTP-Bund spread measures the yield difference between Italian and German government bonds and is a key indicator of euro-area sovereign stress and fragmentation risk.
EMBI sovereign spread measures the yield premium on emerging-market sovereign debt over U.S. Treasuries and serves as a key gauge of EM credit risk and external financing stress.
Europe Periphery Spreads — BTP-Bund and similar spreads as euro-area fragmentation gauges.
The euro-area sovereign crisis (2010–12) was a doom loop of weak banks and weak sovereigns inside a currency union without a joint fiscal or a trusted LOLR — until OMT and ‘whatever it takes.’
The South Sea Bubble was a 1720 London equity-and-debt-conversion mania around the South Sea Company that imploded the same year, taking a layer of insider finance and political reputations with it.
BTP-Bund spread measures the yield difference between Italian and German government bonds and is a key indicator of euro-area sovereign stress and fragmentation risk.
EMBI sovereign spread measures the yield premium on emerging-market sovereign debt over U.S. Treasuries and serves as a key gauge of EM credit risk and external financing stress.
The euro-area sovereign crisis (2010–12) was a doom loop of weak banks and weak sovereigns inside a currency union without a joint fiscal or a trusted LOLR — until OMT and ‘whatever it takes.’
Seigniorage is the real resources a sovereign (or a private issuer of money-like claims) obtains by issuing money whose production cost is below face value.