We present an empirically grounded quantitative framework for modelling sovereign credit risk and evaluating the sustainability of sovereign debt. We study the impact of fiscal and public investment policies on the sovereign's borrowing cost and credit risk in presence of stochastic output shocks and credit-sensitive funding from investors, with a focus on the dynamics of liquidity flows and the sustainability of sovereign debt. Our model successfully replicates a range of empirical observations on sovereign credit risk and sovereign defaults. In particular, it reproduces Argentina’s 2001 default and Greece’s 2011 debt restructuring events and leads to realistic dynamics for debt, spreads and credit ratings conditional on output.
The framework is useful for debt sustainability analysis and may be used to estimate the impact of fiscal policy on debt and output.
About the speaker
Karolina Bassa is a DPhil student at the CDT in the Mathematics of Random Systems at the University of Oxford. Karolina is undertaking research with Rama Cont, Doyne Farmer, and Susanna Saroyan on the topic of climate change risks to the financial system, and is funded by Fidelity. She is interested in developing a methodology for climate stress testing and pricing climate risks in financial products, especially in the sovereign bond market. Using data science, network theory, and machine learning, she hopes to enable investors to integrate climate change into financial decision making.
Prior to starting her DPhil, Karolina, obtained an integrated Master’s degree in Mathematics and Philosophy at the University of Oxford. Her interest in finance led her to complete internships with the JP Morgan Macroeconomic Research Team in Emerging Markets, and the Business Development division at Jane Street. Providing a bridge between academia and the industry is one of Karolina's priorities.