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Estimating a Risky Term Structure of Uruguayan Sovereign Bonds

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Author Info
Serafín Frache (Facultad de Ciencias Económicas y de Administración, Universidad de la República)
Gabriel Katz (Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
Abstract

Based on a joint three – factor a¢ ne model, we estimate the term structure of interest rates and default spreads for Uruguay using the reduced - form approach developed by Du¢ e and Singleton. We …nd that Uruguayan average term structure was negatively sloped between 1997 and 2003, as indicated by previous empirical evidence for low –quality debtors. Surprisingly, Uruguayan average yield curve was also negatively sloped between 1997 and 2001, when the country’s foreign –currency denominated debt was considered investment grade by the leading rating agencies. We also …nd that the estimated Uruguayan default spread is able to capture the behavior and dynamics of a more traditional country risk benchmark such as the “Uruguayan Bond Index” (UBI), with observations on a single Uruguayan bond. Finally, we …nd that regional, international and local …nancial crises cause parallel shifts in the Uruguayan yield curve, with higher increases in short –term rates, and that the banking and debt crises experienced by the country in 2002 had the biggest e¤ects on the average Uruguayan term structure.

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Paper provided by Department of Economics - dECON in its series Documentos de Trabajo (working papers) with number 0304.

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Length: 28 pages
Date of creation: May 2004
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Handle: RePEc:ude:wpaper:0304

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Related research
Keywords: default risk term structure reduced-form model default spread

Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Schönbucher, Philipp J., 1996. "The Term Structure of Defaultable Bond Prices," Discussion Paper Serie B 384, University of Bonn, Germany. [Downloadable!]
  2. Sarig, Oded & Warga, Arthur, 1989. " Some Empirical Estimates of the Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(5), pages 1351-60, December. [Downloadable!] (restricted)
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    Other versions:
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  5. Henri Bernard & Stefan Gerlach, 1996. "Does the term structure predict recessions? The international evidence," BIS Working Papers 37, Bank for International Settlements. [Downloadable!]
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  6. Henri Pagès, 2001. "Can liquidity risk be subsumed in credit risk? A case study from Brady bond prices," BIS Working Papers 101, Bank for International Settlements. [Downloadable!]
  7. Gonzalo Cortazar & Eduardo Schwartz & Lorezo Naranjo, 2003. "Term Structure Estimation in Low-Frequency Transaction Markets: A Kalman Filter Approach with Incomplete Panel-Data," University of California at Los Angeles, Anderson Graduate School of Management 1109, Anderson Graduate School of Management, UCLA. [Downloadable!]
  8. Frankel, Jeffrey A & Lown, Cara S, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve along Its Entire Length," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 517-30, May. [Downloadable!] (restricted)
    Other versions:
  9. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 687-720.
  10. Manuel Moreno, 1997. "Risk Management under a Two-Factor Model of the Term Structure of Interest Rates," Economics Working Papers 254, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  13. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Simon H. Babbs, 2002. "Conditional Gaussian models of the term structure of interest rates," Finance and Stochastics, Springer, vol. 6(3), pages 333-353. [Downloadable!] (restricted)
  15. Langetieg, Terence C, 1980. " A Multivariate Model of the Term Structure," Journal of Finance, American Finance Association, vol. 35(1), pages 71-97, March. [Downloadable!] (restricted)
  16. Oldfield, George S. & Rogalski, Richard J., 1987. "The stochastic properties of term structure movements," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 229-254, March. [Downloadable!] (restricted)
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