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Sources of Sovereign Default Risk: An empirical analysis

by John Matovu of Makerere University

April 23, 2007

Abstract: From sovereign default risk perspective, little is known about the distress factors that are important in explaining variations in defaultable sovereign bonds. This paper proposes and empirically tests a family of default risk models with different sources of risk. At each instant there is some probability that the sovereign bond issuer defaults on its obligations and is a function of maturity or currency mismatches or the solvency. The proposed models are estimated using data on Argentina and Brazil. Using these indicators yields an estimated default risk whose pattern is closely similar to the country risk indicators such as the Emerging Market Bond Index (EMBI).

Keywords: Vulnerability Indicators, Sovereign, Default Risk.

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