Journal of Risk Model Validation

Country default probabilities: assessing and backtesting

Stefan Huschens, Alexander Karmann, Dominik Maltritz, Konstantin Vogl


We present statistical backtesting procedures applicable in situations where few and heterogeneous probabilities have to be evaluated, as is typically the case when forecasting country default risk. These tests are applied to a sample of default probabilities assessed for 19 emerging market and transition countries by estimating a Merton-type credit risk model using bond market data. For the estimation, we use a maximum likelihood technique based on time series of market data. Thereby, we avoid the drawbacks of the alternative approaches commonly used in the literature.

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