Evaluating the sovereign and household credit risk in Singapore: A contingent claims approach |
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| Affiliation: | 1. Assistant Professor of Finance, Dolan School of Business, Fairfield University, Fairfield, CT 06824, United States;2. Professor of Finance, Zarb School of Business, Hofstra University, Hempstead, NY 11549, United States;3. Economist, AIG, New York, NY 10038, United States;1. Goodman School of Business, Department of Finance, Operation and Information Systems, Brock University, Canada;2. College of Economics and Political Science, Department of Economics and Finance, Sultan Qaboos University, Oman;1. Department of Banking and Finance, Universität Innsbruck, Universitätsstrasse 15, A-6020 Innsbruck, Austria;2. UBS Asset Management, Bahnhofstrasse 45, CH-8001 Zürich, Switzerland;1. Department of Finance, Faculty of Economic Sciences, National Research University – Higher School of Economics, Moscow, Russia;2. Research & Training Laboratory of Financial Markets Analysis, Faculty of Economic Sciences, National Research University – Higher School of Economics, Moscow, Russia |
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| Abstract: | This study evaluates the credit risk of the household and government (sovereign) sectors in Singapore using the contingent claims approach (CCA). The CCA model estimates the default probability of both sectors based on the market value of the assets and liabilities of the sectors. Compared to the traditional credit rating system, this model is able to provide numerical estimates of the exposures and default probabilities. We find that from the year 2000 to 2013, variations in the credit risk measures correspond to the economic growth of Singapore. In addition, we suggest that the main factor affecting the credit risks in the government and household sectors in Singapore is the volatility of the assets held by both sectors, given that the asset-to-distress barrier ratios are relatively stable over the past 14 years for both sectors. |
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| Keywords: | Contingent claims Credit risk Sovereign credit risk |
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