Brady Bonds and Default Probabilities

Author/Editor:

Ivailo Izvorski

Publication Date:

February 1, 1998

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 1998/016

Subject:

Asset prices Bonds Collateral Financial institutions Financial services Prices Treasury bills and bonds Yield curve

English

Publication Date:

February 1, 1998

ISBN/ISSN:

9781451843378/1018-5941

Stock No:

WPIEA0161998

Pages:

24

Please address any questions about this title to publications@imf.org