Measuring Sovereign Risk With Contingent Claims Analysis: The Empirical Evidence in Southeast Asia Credit Markets

Abstract

This paper focuses on examining the degree to which the Contingent Claims Analysis is useful for Southeast Asia markets. Such a framework is initially developed for analyzing corporate sector default based on the theory of Black-Scholes options pricing and the structure of accounting balance sheet, and then adapted to the sovereign balance sheet in a way that can help forecast credit spreads and evaluate the impacts of risk transferred from other sectors. Robustness checks indicate that sovereign CCA is consistent with most markets in the sample. Scenario analysis interprets two prospects with assumptions on economic growth and capital structure of the Vietnam government in the short-term future.