Default Probabilities on European Sovereign Debt: Market-based Estimates
نویسندگان
چکیده
This paper attempts to extract real-time market-based estimates of the default probabilities on Government debt for a selection of European countries, using a technique applied by Bierman and Hass (1979) and Fons (1987) in the corporate debt market. The technique involves solving the debt pricing equation for the martingale probabilities which under the no-arbitrage assumption equate the price of risky debt discounted at the riskless rate to the actual price. Results for Belgium, Finland, Ireland, Italy, and Spain suggest default probabilities have tended to decline as EMU has approached.
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