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Brady Bonds and Default Probabilities

Author

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  • Ivailo Izvorski

Abstract

This paper computes the default probabilities implicit in the prices of Brady bonds of seven developing countries and examines the factors that determine the high cross-correlation of the probability paths. The term structure of U.S. interest rates and the ratio of long-term foreign debt to GDP, together with a developing market index, explain more than 75 percent of the cross-sectional distribution of the default probabilities. The paper also demonstrates a new way to extract sovereign riskiness, implicit in traded bond prices. This allows the above results to be interpreted as explaining the cross-sectional distribution of sovereign riskiness as well.

Suggested Citation

  • Ivailo Izvorski, 1998. "Brady Bonds and Default Probabilities," IMF Working Papers 1998/016, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/016
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    Cited by:

    1. Vasilev, Aleksandar, 2015. "Analysis of Sovereign Yield Spreads Behavior: The French Bonds Case," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(3).
    2. Berardi, Andrea & Ciraolo, Stefania & Trova, Michele, 2004. "Predicting default probabilities and implementing trading strategies for emerging markets bond portfolios," Emerging Markets Review, Elsevier, vol. 5(4), pages 447-469, December.

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