Quantitative Properties of Sovereign Default Models: Solution Methods Matter
We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of gri...
Gespeichert in:
| 1. Verfasser: | |
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| Format: | Elektronisch E-Book |
| Sprache: | English |
| Veröffentlicht: |
Washington, D.C
International Monetary Fund
2010
|
| Schriftenreihe: | IMF Working Papers
Working Paper No. 10/100 |
| Online-Zugang: | UBW01 UEI01 LCO01 SBR01 UER01 SBG01 UBG01 FAN01 UBT01 FKE01 UBY01 UBA01 FLA01 UBM01 UPA01 UBR01 FHA01 FNU01 BSB01 TUM01 Volltext |
| Zusammenfassung: | We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interest rate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis questions the robustness of results in the sovereign default literature and is also relevant for the study of other credit markets |
| Beschreibung: | 1 Online-Ressource (28 p) |
| ISBN: | 1451982771 9781451982770 |
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| index_date | 2024-07-03T20:13:27Z |
| indexdate | 2024-07-10T09:35:36Z |
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| record_format | marc |
| series2 | IMF Working Papers |
| spelling | Martinez, Leonardo Verfasser aut Quantitative Properties of Sovereign Default Models Solution Methods Matter Martinez, Leonardo Washington, D.C International Monetary Fund 2010 1 Online-Ressource (28 p) txt rdacontent c rdamedia cr rdacarrier IMF Working Papers Working Paper No. 10/100 We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interest rate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis questions the robustness of results in the sovereign default literature and is also relevant for the study of other credit markets Online-Ausg Hatchondo, Juan Carlos Sonstige oth Sapriza, Horacio Sonstige oth http://elibrary.imf.org/view/IMF001/10875-9781451982770/10875-9781451982770/10875-9781451982770.xml Verlag URL des Erstveröffentlichers Volltext |
| spellingShingle | Martinez, Leonardo Quantitative Properties of Sovereign Default Models Solution Methods Matter |
| title | Quantitative Properties of Sovereign Default Models Solution Methods Matter |
| title_auth | Quantitative Properties of Sovereign Default Models Solution Methods Matter |
| title_exact_search | Quantitative Properties of Sovereign Default Models Solution Methods Matter |
| title_exact_search_txtP | Quantitative Properties of Sovereign Default Models Solution Methods Matter |
| title_full | Quantitative Properties of Sovereign Default Models Solution Methods Matter Martinez, Leonardo |
| title_fullStr | Quantitative Properties of Sovereign Default Models Solution Methods Matter Martinez, Leonardo |
| title_full_unstemmed | Quantitative Properties of Sovereign Default Models Solution Methods Matter Martinez, Leonardo |
| title_short | Quantitative Properties of Sovereign Default Models |
| title_sort | quantitative properties of sovereign default models solution methods matter |
| title_sub | Solution Methods Matter |
| url | http://elibrary.imf.org/view/IMF001/10875-9781451982770/10875-9781451982770/10875-9781451982770.xml |
| work_keys_str_mv | AT martinezleonardo quantitativepropertiesofsovereigndefaultmodelssolutionmethodsmatter AT hatchondojuancarlos quantitativepropertiesofsovereigndefaultmodelssolutionmethodsmatter AT saprizahoracio quantitativepropertiesofsovereigndefaultmodelssolutionmethodsmatter |