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The Term Structure of Sovereign Spreads in Emerging Markets : A calibration Approach for Structural Models

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  • Kátia Rocha
  • Francisco A. Alcaraz Garcia

Abstract

Este trabalho apresenta um modelo estrutural para estimar a estrutura a termo dospread soberano e a probabilidade implícita de default em um grupo de paísesemergentes que compõe mais do que 50% do índice EMBIG do JP Morgan. Adinâmica da taxa real de câmbio evolui de acordo com um processo de difusãosimples, e representa a variável indicativa do evento de default. Relaxando-se ahipótese de mercado completo, o modelo calibrado reproduz a estrutura a termo dosspreads de forma consistente com a observada no mercado, gerando desvios absolutosmenores que 30 (México, Rússia e Turquia) ou 60 (Brasil) pontos-base. O modeloproposto é robusto e, portanto, a crítica a respeito dos modelos estruturaissubestimando a magnitude dos spreads deve ser reconsiderada.Nossos resultados revelam que o mercado está sobreestimando os spreads para oBrasil, enquanto para México, Turquia e Rússia o modelo reproduz o comportamentodo mercado. This paper proposes a simple structural model to estimate the term structure ofsovereign spreads and the implied default probability of a selected group of emergingcountries, which accounts for more than 50% of the J. P. Morgan EMBIG index.The real exchange rate dynamics, modeled as a pure diffusion process, are assumed totrigger default event. By relaxing the hypothesis of market completeness, thecalibrated model generates sovereign spread curves consistent with market data,giving average deviations below 30 (Mexico, Russia and Turkey) or 60 (Brazil) basispoints over time. We show the robustness of the model and argue that the criticismof structural models for underestimating the magnitude of market spreads should bereconsidered. The results suggest that the market tends to overprice the spreads forBrazil, whereas for Mexico, Russia and Turkey the model reproduces the marketbehavior.

Suggested Citation

  • Kátia Rocha & Francisco A. Alcaraz Garcia, 2004. "The Term Structure of Sovereign Spreads in Emerging Markets : A calibration Approach for Structural Models," Discussion Papers 1048, Instituto de Pesquisa Econômica Aplicada - IPEA.
    • Handle: RePEc:ipe:ipetds:1048
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    1. Pardo, Cristian, 2012. "Risk aversion and business cycles: An empirical analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(4), pages 413-426.

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