Estimation of Sovereign Default Intensities andSovereign Credit Default Swaps Valuation

We estimate the default intensities of sovereign entities from sovereign bonds by simulated maximum likelihood estimation (SMLE). The estimated results are used to price the sovereign credit default swaps and evaluate the pricing errors with the market data. We find that credit default swaps are more sensitive to market information than their reference obligations. As a result, for probable financial crisis in a country, credit default swaps may overreact the risk and result in higher spreads. Key words: Sovereign Credit Default Swap, Default Intensity, CIR Model, Simulated Likelihood Approximation