TY - JOUR T1 - Forecasting Sovereign Default Risk with Merton’s Model JF - The Journal of Fixed Income SP - 58 LP - 71 DO - 10.3905/jfi.2015.25.2.058 VL - 25 IS - 2 AU - Johan Duyvesteyn AU - Martin Martens Y1 - 2015/09/30 UR - https://pm-research.com/content/25/2/58.abstract N2 - Merton’s structural model for sovereigns is proven to be useful to analyze the default risk of a country. We are the first to investigate how fast CDS spreads react to changes in model inputs and outputs. CDS spread changes strongly correlate with exchange rate returns, which are an input to the model. But CDS spread changes on average react with a delay to changes in model outputs such as the distance to default, the default probability, and model spreads. Hence, contingency claim analysis for sovereigns provides useful predictions for CDS spreads.TOPICS: Fixed income and structured finance, credit default swaps ER -