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

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Author Info

  • 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.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-18.

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Length: 34 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:chf:rpseri:rp0718

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: Emerging markets; sovereign default; rating transitions; yield spreads; default premia;

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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.

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