A Risk Quantification Model for Public Debt Management

There is widespread agreement among leading debt management practitioners about the adequacy of debt servicing cash flow simulation technique to estimate the cost and risk of a sovereign liability portfolio. This practice gains a solid theoretical platform when re-cast into an asset liability management (ALM) framework. The issue then becomes how to incorporate the government’s assets into cost and risk estimation. In a model developed in The World Bank, it is proposed that such a link be built by incorporating an analysis of the financial features of those assets, namely their sensitivity to currency and interest rate changes, as the metrics to measure the cost and risk of the liabilities. Within the ALM framework additional alternatives such as the joint modeling of assets and liabilities could be explored.