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Optimization and Engineering

, Volume 18, Issue 2, pp 537–558 | Cite as

Stochastic debt sustainability analysis for sovereigns and the scope for optimization modeling

Discussion Article

Abstract

We argue that sovereign debt sustainability analysis must be augmented by stochastic correlated risk factors and a risk measure to capture tail effects. Crisis situations can thus be adequately specified and analyzed with sufficient accuracy to warrant the relevance of policy decisions. In this context there is significant scope for optimization modeling for both strategic planning and operational management. We discuss diverse aspects of the problem of debt sustainability and highlight modeling approaches that can be brought to bear on the problem. Results with the fictitious, but nor unrealistic, Kingdom of Atlantis, which is sinking under excessive debt, illustrate the proposed models.

Keywords

Sovereign debt Debt restructuring Restructuring Sustainability Scenarios Portfolio optimization CVaR 

Notes

Acknowledgements

The authors benefited from the comments of three anonymous referees and discussions with Marialena Athanassopoulou, Aitor Erce, Angel Gavilan, Anna Gelpern, Martin Guzman, Alex Meeraus, Enrique Mendoza, Edmund Moshammer, Joseph Stiglitz, Bill Ziemba, and seminar participants at the Finance Departments of the Wharton School and Rensselaer Polytechnic Institute, CIGI at Columbia University, Stevens Institute of Technology, Bank of England and European Stability Mechanism. Stavros Zenios is holder of a Marie Sklodowska-Curie fellowship funded from the European Union Horizon 2020 research and innovation programme under Grant Agreement No. 655092.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.University of PalermoPalermoItaly
  2. 2.University of CyprusNicosiaCyprus
  3. 3.Norwegian School of EconomicsBergenNorway
  4. 4.Wharton Financial Institutions CenterUniversity of PennsylvaniaPhiladelphiaUSA

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