Texto para discussão n. 18: sovereign debt risk modeling and portfolio management

Abstract

This paper presents a compilation of interesting models to treat sovereign debt portfolio applied to debt management offices. It starts with an analytical balance sheet and net worth optimization and evolves onto policy decisions based on deterministic and stochastic debt simulation models. Important risk measures derived from Value-at-Risk variations are drawn from these, which enables debt managers to prospect the results of a given funding strategy. Finally, further analysis on the asset side are introduced in light of the shape and size of government liabilities to verify if policy decisions change in such circumstances. The conclusion is that while balance sheet and net worth optimization are more affine to optimal taxation theory, debt service simulation models are more appealing to most practioneers.