PT - JOURNAL ARTICLE AU - Johan Duyvesteyn AU - Martin Martens TI - Forecasting Sovereign Default Risk with Merton’s Model AID - 10.3905/jfi.2015.25.2.058 DP - 2015 Sep 30 TA - The Journal of Fixed Income PG - 58--71 VI - 25 IP - 2 4099 - https://pm-research.com/content/25/2/58.short 4100 - https://pm-research.com/content/25/2/58.full AB - Merton’s structural model for sovereigns is proven to be useful to analyze the default risk of a country. We are the first to investigate how fast CDS spreads react to changes in model inputs and outputs. CDS spread changes strongly correlate with exchange rate returns, which are an input to the model. But CDS spread changes on average react with a delay to changes in model outputs such as the distance to default, the default probability, and model spreads. Hence, contingency claim analysis for sovereigns provides useful predictions for CDS spreads.TOPICS: Fixed income and structured finance, credit default swaps