Unit V - Managing of the sovreign risk and stochastic optimization

Italian version

Lecturer: Andrea Consiglio

The module aims are the analysis of the mechanisms governing the dynamics of sovereign debt and the its sustainability assessments.

In the first part of the module, we will study how sovereign debt evolves and the economic factors determining its accumulation. The traditional analysis will be extended by considering stochastic models for fundamental economic factors and their simulation through stochastic trees.

We will present a model for the generation of stochastic trees, whose deployment is a key issue in debt sustainability analysis. We will look at the impact on two major debt aggregates, the stock of debt and the gross financing need, respectively, a measure of the stock of debt and a measure of the flow generated by the debt.

In the second part of the module, we will study an optimization model for the optimal issuance of debt instruments, with the aim of minimizing the quantiles of the probability distributions of the stock or debt flow. We will also introduce and analyze the effect of operational constraints on the optimal dynamics to account for the actual needs of a debt manager. The whole framework is based on the case study of developed for the European Stability Mechanism.

Papers suggested:

• J. Escolano. A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates,

• M. Athanasopoulou, A. Consiglio et al. Risk management for sovereign financing within a debt sustainability framework (Policy Report),

• S.A. Zenios and A. Consiglio. Risk Management for Sovereign Debt Financing with Sustainability Conditions.