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Emerging market debt: measuring credit quality and examining relative pricing

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  • Cumby, Robert E.
  • Pastine, Tuvana

Abstract

We investigate the pricing of ‘Brady’ bonds that are issued by the governments of five developing countries as part of debt and debt service reduction agreements. We first present a measure of credit quality that takes account of the individual features of each bond and is comparable across bonds, across issuers, and over time. We then examine the evolution of the credit quality of each debt instrument from 1990 until the beginning of 2000. Next, we present evidence of a profitable trading strategy that exploits the information contained in this measure of credit quality.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 20 (2001)
Issue (Month): 5 (October)
Pages: 591-609

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Handle: RePEc:eee:jimfin:v:20:y:2001:i:5:p:591-609

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Web page: http://www.elsevier.com/locate/inca/30443

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References

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  1. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing Country Debt Crisis," NBER Working Papers 2455, National Bureau of Economic Research, Inc.
  2. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
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  4. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, vol. 29(3), pages 271-306, November.
  5. Lee, Suk Hun & Sung, Hyun Mo & Urrutia, Jorge L., 1996. "The behavior of secondary market prices of LDC syndicated loans," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 537-554, April.
  6. Wu, Chunchi & Yu, Chih-Hsien, 1996. "Risk aversion and the yield of corporate debt," Journal of Banking & Finance, Elsevier, vol. 20(2), pages 267-281, March.
  7. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
  8. Sule Ozler & Harry Huizinga, 1992. "Bank Exposure, Capital and Secondary Market Discounts on the Developing Country Debt," NBER Working Papers 3961, National Bureau of Economic Research, Inc.
  9. In Joon Kim & Krishna Ramaswamy & Suresh Sundaresan, 1993. "Does Default Risk in Coupons Affect the Valuation of Corporate Bonds?: A Contingent Claims Model," Financial Management, Financial Management Association, vol. 22(3), Fall.
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  11. Boehmer, Ekkehart & Megginson, William L, 1990. " Determinants of Secondary Market Prices for Developing Country Syndicated Loans," Journal of Finance, American Finance Association, vol. 45(5), pages 1517-40, December.
  12. Raquel Fernandez & Sule Ozler, 1991. "Debt Concentration and Secondary Markets Prices: A Theoretical and Empirical Analysis," NBER Working Papers 3654, National Bureau of Economic Research, Inc.
  13. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
  14. Yawitz, Jess B & Maloney, Kevin J & Ederington, Louis H, 1985. " Taxes, Default Risk, and Yield Spreads," Journal of Finance, American Finance Association, vol. 40(4), pages 1127-40, September.
  15. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  16. Stone, Mark R., 1991. "Are sovereign debt secondary market returns sensitive to macroeconomic fundamentals? Evidence from the contemporary and interwar markets," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages S100-S122, March.
  17. Claessens, Stijn & Pennacchi, George, 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 109-126, March.
  18. Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank.
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Cited by:
  1. Kim Oosterlinck & Loredana Ureche-Rangau, 2008. "Multiple potential payers and sovereign bond prices," ULB Institutional Repository 2013/14301, ULB -- Universite Libre de Bruxelles.
  2. Loredana Ureche-Rangau & Kim Oosterlinck, 2005. "Entre la peste et le choléra : le détenteur d’obligations peut préférer la répudiation au défaut…," Revue d'Économie Financière, Programme National Persée, vol. 79(2), pages 309-331.
  3. Kim Oosterlinck & Loredana Ureche-Rangau, 2005. "Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut," ULB Institutional Repository 2013/6693, ULB -- Universite Libre de Bruxelles.
  4. Ron Alquist, 2008. "How Important Is Liquidity Risk for Sovereign Bond Risk Premia? Evidence from the London Stock Exchange," Working Papers 08-47, Bank of Canada.
  5. Marc D. Weidenmier & Kim Oosterlinck, 2007. "Victory or Repudiation? The Probability of the Southern Confederacy Winning the Civil War," NBER Working Papers 13567, National Bureau of Economic Research, Inc.
  6. Cosmin Ilut & Peter Benczur, 2010. "Evidence for Relational Contracts in Sovereign Bank Lending," 2010 Meeting Papers 91, Society for Economic Dynamics.
  7. Oshiro, Naoto & Saruwatari, Yasufumi, 2005. "Quantification of sovereign risk: Using the information in equity market prices," Emerging Markets Review, Elsevier, vol. 6(4), pages 346-362, December.
  8. Peter Benczur & Cosmin Ilut, 2011. "Evidence for Dynamic Contracts in Sovereign Bank Lending," Working Papers 11-06, Duke University, Department of Economics.

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