Please use this identifier to cite or link to this item: https://doi.org/10.21256/zhaw-1249
Title: Multivariate Sovereign Risk Modeling : Modeling Sovereign Bond Yield and Credit Default Swap Spreads in Parametric and Non-Parametric Frameworks
Authors : Kamtzi, Tenzin
Advisors / Reviewers : Schwendner, Peter
Publisher / Ed. Institution : ZHAW Zürcher Hochschule für Angewandte Wissenschaften
Issue Date: 2016
Language : Englisch / English
Subject (DDC) : 658.1: Organisation und Finanzen
Abstract: The worldwide financial crisis of 2008 has shaken the very foundations of modern financial theory, which rested on the hypothesis that financial markets were efficient. Since markets have been inconsistently pricing sovereign risk, recent studies suggests that there may be “multiple equilibria” between sovereign risk prices and underlying fundamentals. As a consequence, scientific papers focus on analyzing government risk and its determinants. For this purpose, most studies employed parametric models in order to examine the impact of variables on sovereign risk. However recent scientific studies suggest that these parametric models are not an appropriate approach to model the non-linear dynamics of sovereign risk markets. In this study there are two different modeling techniques applied in order to verify whether non-parametric models estimate sovereign risk measures more accurately than parametric models. Moreover, it is aimed to expose indications of multiple equilibria on the European sovereign risk markets based on an ex-post analysis. In order to evaluate estimation accuracy and explanatory power of parametric and non-parametric models, there are 16 different European sovereigns assessed by regarding an estimation error indicator. Indications of multiple equilibria are exposed by focusing on dynamics of determinants and with respect to the individuality of European sovereigns. For this purpose, we employed a three-stage panel data analysis. The empirical results revealed complex and dynamic European sovereign risk markets. We found that non-parametric models generally connect more accurately underlying fundamentals to actual spreads than generic parametric models, even though qualitatively are both models similar. The dynamics of sovereign risk markets is manifested in alternating sensitivity of certain fundamentals as well as in time-varying risk determinants, which indicates an inconsistent perception of the market equilibria. Finally, we found that market participants distinguish consciously the geographical affiliation of a sovereign by charging discernible risk premium. The empirical results suggest that since global financial crisis debt-related macro variables have been gaining in importance. In particular, we found in combination with high unemployment rate countries reflect high likelihood of default. This finding may provide valuable early warning signals to countries that move towards dangerous risk paths.
Departement: School of Management and Law
Publication type: Thesis: Bachelor / Bachelor Thesis
DOI : 10.21256/zhaw-1249
URI: https://digitalcollection.zhaw.ch/handle/11475/1251
Appears in Collections:Abschlussarbeiten Betriebsökonomie

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