Pricing Sovereign Credit Risk of Poland: Evidence from the CDS Market |
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| Authors: | Gonzalo Camba-Méndez Konrad Kostrzewa Anna Marszal |
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| Institution: | 1. Capital Markets and Financial Structure Division, European Central Bank, Frankfurt am Main, Germany;2. Financial Stability Department, Narodowy Bank Polski, Warszawa, Poland;3. Domestic Operations Department, Narodowy Bank Polski, Warszawa, Poland |
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| Abstract: | We analyze the market assessment of sovereign credit risk using a reduced-form model to price the credit default swap (CDS) spreads, thus enabling us to derive values for the probability of default (PD) and loss given default (LGD) from the quotes of sovereign CDS contracts. We compare different specifications of the models allowing for both fixed and time-varying LGD, and we use these values to analyze the sovereign credit risk of Polish debt throughout the period of a global financial crisis. Our results suggest the presence of a low LGD and a relatively high PD during a recent financial crisis. |
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| Keywords: | CDS spreads loss given default Poland probability of default sovereign credit risk |
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