Reports Summarize Risk Management Research from Aalto University (Examination of Interest-Growth Differentials and the Risk of Sovereign Insolvency)

2021 APR 29 (NewsRx) -- By a News Reporter-Staff News Editor at NewsRx Policy and Law Daily -- Research findings on insurance are discussed in a new report. According to news reporting originating from Espoo, Finland, by NewsRx correspondents, research stated, “The objective of this research was to demonstrate the (nonlinear) risks of sovereign insolvency and explore the applicability of stochastic modeling in public debt management, given a structural economic model of stochastic government debt dynamics.”

The news correspondents obtained a quote from the research from Aalto University: “A stochastic optimal control model was developed to model public debt dynamics based on the debt accounting identity, where the interest-growth differential obeys a continuous random process. This stochasticity represents both the interest rate risk of public debt and the variability of the growth rate of the nominal Gross Domestic Product combined. The optimal fiscal policy was analyzed in terms of the model parameters. The model was simulated, and results were visualized. The insolvency risk was demonstrated by examining the variance of the optimal process. The model was amended with hidden credit risk premia and fiscal multipliers, which forces the debt dynamics to be nonlinear in the debt ratio.”

According to the news reporters, the research concluded: “The results, on the other hand, confirm that the volatility of the interest-growth differential is crucial in terms of sovereign solvency and in addition, it demonstrates the large risks stemming from the multiplier effect, which underlines the need for prudent debt management and fiscal policy.”

For more information on this research see: Examination of Interest-Growth Differentials and the Risk of Sovereign Insolvency. Risks, 2021,9(75):75. (Risks - http://www.mdpi.com/journal/risks). The publisher for Risks is MDPI AG.

A free version of this journal article is available at https://doi.org/10.3390/risks9040075.

Our news editors report that more information may be obtained by contacting Jussi Lindgren, Department of Mathematics and Systems Analysis, Aalto University, 02150 Espoo, Finland.

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