What did the credit market expect of Argentina default? Evidence from default swap data
AbstractThis article explores the expectations of the credit market by developing a parsimonious default swap model, which is versatile enough to disentangle default probability from the expected recovery rate, accommodate counterparty default risk, and allow flexible correlation between state variables. We implements the model to a unique sample of default swaps on Argentine sovereign debt, and found that the risk-neutral default probability was always higher than its physical counterpart, and the wedge between the two was affected by changes in the business cycle, the U.S. and Argentine credit conditions, and the overall strength of the Argentine economy. We also found that major rating agencies had assigned over-generous ratings to the Argentine debt, and they lagged the market in downgrading the debt.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-25.
Date of creation: 2003
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-09-08 (All new papers)
- NEP-FMK-2003-09-08 (Financial Markets)
- NEP-LAM-2003-09-08 (Central & South America)
- NEP-RMG-2003-09-08 (Risk Management)
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