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Sovereign Rating Transitions And The Price Of Default Risk In Emerging Markets

Author

Listed:
  • Alena Audzeyeva

    (University of Leeds, Business School)

  • Klaus Reiner Schenk-Hoppe

    (University of Leeds, School of Mathematics)

Abstract

This paper introduces an expected value estimator with “expert knowledge” to the robust estimation of sovereign rating transitions which are characterised by few observations. Our estimates of default premia within Mexican, Colombian and Brazilian Eurobond yield spreads provide a better fit than ‘cohort’ and continuous-time observation approaches. The analysis suggests that default risk accounted for a rather small share (decreasing with maturity) of the yield spreads for non-investment grade Colombian and Brazilian Eurobonds in 2003. This share increased while yield spreads fell during 2003-2005 mainly due to non-default risk factors. Default and liquidity premia for investment-grade Mexican spreads both decreased at similar rates.

Suggested Citation

  • Alena Audzeyeva & Klaus Reiner Schenk-Hoppe, 2007. "Sovereign Rating Transitions And The Price Of Default Risk In Emerging Markets," Swiss Finance Institute Research Paper Series 07-18, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0718
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    File URL: http://ssrn.com/abstract=999316
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    Cited by:

    1. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1327-1343, June.

    More about this item

    Keywords

    Emerging markets; sovereign default; rating transitions; yield spreads; default premia;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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