Brady Bonds and Default Probabilities
February 1, 1998
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Summary
This paper computes the default probabilities implicit in the prices of Brady bonds of seven developing countries and examines the factors that determine the high cross-correlation of the probability paths. The term structure of U.S. interest rates and the ratio of long-term foreign debt to GDP, together with a developing market index, explain more than 75 percent of the cross-sectional distribution of the default probabilities. The paper also demonstrates a new way to extract sovereign riskiness, implicit in traded bond prices. This allows the above results to be interpreted as explaining the cross-sectional distribution of sovereign riskiness as well.
Subject: Asset prices, Bonds, Collateral, Financial institutions, Financial services, Prices, Treasury bills and bonds, Yield curve
Keywords: Asset prices, bond, Bonds, Brady bond issuer, Brady bonds, Collateral, default, default probabilities, default probabilities Index, default probability, discount Brady bonds, Eastern Europe, price, probability of default, sovereign riskiness, Treasury bills and bonds, WP, Yield curve
Pages:
24
Volume:
1998
DOI:
Issue:
016
Series:
Working Paper No. 1998/016
Stock No:
WPIEA0161998
ISBN:
9781451843378
ISSN:
1018-5941
