We compare the performance of a structural and a reduced form default risky bond pricing model for Brady bonds from different countries. Goodness of fit statistics indicate comparable in-sample model performance whilst our out-of-sample tests favour the reduced form model. We also find evidence that a decrease in US interest rates is associated with larger sovereign spreads, consistent with flights-to-quality at times of financial crisis. We test for a common factor driving default probabilities across countries, using our reduced form model. We find that this factor is statistically significant indicating the presence of contagion effects in this market. Copyright Blackwell Publishing Ltd and The University of Manchester, 2005.
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