A sovereign risk index for the Eurozone based on stochastic dominance

We propose a new method to assess sovereign risk in Eurozone countries using an approach that relies on consistent tests for stochastic dominance e¢ ciency. The test statistics and the estimators are computed using mixed integer programming methods. This paper’s analysis is based on macroeconomic fundamentals and their importance in accounting for sovereign risk. The results suggest that the net international investment position/GDP and public debt/GDP are the main contributors to country risk in the Eurozone. We also conduct ranking analysis of countries for …scal and external trade risk. We …nd a positive correlation between our rankings of the most vulnerable countries and the S&P’s ratings, whereas the correlation for other countries is weaker.