CSTIO Seminar with Prof Stavros Zenios (Durham University)

Sovereign debt sustainability analysis under climate change and political risk

Abstract

This talk synthesizes work over the last five years to develop theoretically rigorous and empirically relevant debt sustainability analysis models. I will first discuss how to model financial, economic, and fiscal uncertainty with correlations and fat tails using scenario trees. I will then set up the sovereign’s debt financing optimization model. It addresses the problem of public debt management offices to finance government borrowing "at the lowest cost against acceptable risks" with debt sustainability conditions on debt stock and flow. We first use the model to assess the impact of a large quantitative easing program of the ECB on debt dynamics. We then discuss the integration of (i) climate change risks and (ii) political risk in the analysis and show results with both. The climate change analysis is complicated by deep uncertainty —risks, ambiguity, and mis-specifications. We can deal with these three challenges using scenario trees, narrative scenarios, and ensembles of models. For political risk, I will also provide empirical evidence of a global political risk factor (P-factor) and its effects on sovereign debt through yields and growth channels.

About the speaker

Stavros A. Zenios is a Professor of Operations Management and Finance on sabbatical leave from the University of Cyprus. He is also a Member of the National Academy of Sciences, Letters, and Arts of Cyprus, and a Non-resident Fellow of Bruegel in Brussels.

He is the author of two books and more than 130 scholarly articles in leading international journals in risk management, financial engineering, and management science. He is currently working on sovereign debt sustainability issues, including the effects of climate change and the pricing of political risks. His work on personal financial planning received the EURO Excellence in Practice Award, and he also received awards for his work on the performance of financial institutions. He was awarded two Marie Sklodowska-Curie fellowships by the European Commission. His work on financial modeling and robust optimization is cited extensively, with more than 13,000 citations (h-index 55, i-10index 144). His book Practical Financial Optimization: Decision Making for Financial Engineers (Blackwell-Wiley Finance) is used in advanced classes in European and North American Universities. His book with Patrick Harker on the Performance of Financial Institutions (Cambridge University Press) was translated into Chinese. His book with Yair Censor Parallel Optimization (Oxford University Press) received the INFORMS Prize for Computing.