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The Term Structure of Country Risk and Valuation in Emerging Markets

Author

Listed:
  • Juan Jose Cruces

    (Department of Economics, Universidad de San Andres)

  • Marcos Buscaglia

    (IAE)

  • Joaquin Alonso

    (Mercado Abierto S.A.)

Abstract

Most practitioners add the country risk to the discount rate when valuing projects in Emerging Markets. This practice does not account for the fact that the default risk term structure can be nonflat. The mismatch between the duration of the project under valuation and the duration of the most widely used measure of country risk, J.P. Morgan’s EMBI, leads to an overvaluation (undervaluation) of long-term projects when the term structure of default risk is upward (downward) sloping. Using sovereign bond data from five Emerging Markets, we estimate a simple model that captures most of the variation of conditional default probabilities at different horizons for a given country at one point in time. This model can be used to solve the misestimation problem.

Suggested Citation

  • Juan Jose Cruces & Marcos Buscaglia & Joaquin Alonso, 2002. "The Term Structure of Country Risk and Valuation in Emerging Markets," Working Papers 46, Universidad de San Andres, Departamento de Economia, revised Apr 2002.
    • Handle: RePEc:sad:wpaper:46
    as

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    File URL: https://webacademicos.udesa.edu.ar/pub/econ/doc46.pdf
    File Function: Revised version, 2002
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Emerging Economies; Cost of Capital; Default Risk;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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