A new estimation technique of sovereign default risk

Abstract

Using theŞxed-point theorem, sovereign default models are solved by numerical value function iterationand calibration methods, which due to their computational constraints, greatly limits the models'quantitative performance and foregoes its country-speciŞc quantitative projection ability. By applyingthe Hotz-Miller estimation technique (Hotz and Miller, 1993)- often used in applied microeconometricsliterature- to dynamic general equilibrium models of sovereign default, one can estimate the ex-antedefault probability of economies, given the structural parameter values obtained from country-speciŞcbusiness-cycle statistics and relevant literature. Thus, with this technique we offer an alternative solution method to dynamic general equilibrium models of sovereign default to improve upon their quantitative inference ability.