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Estimating a Risky Term Structure of Uruguayan Sovereign Bonds

Author

Listed:
  • 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.

Suggested Citation

  • Serafín Frache & Gabriel Katz, 2004. "Estimating a Risky Term Structure of Uruguayan Sovereign Bonds," Documentos de Trabajo (working papers) 0304, Department of Economics - dECON.
  • Handle: RePEc:ude:wpaper:0304
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    References listed on IDEAS

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    More about this item

    Keywords

    default risk; term structure; reduced-form model; default spread;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: 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; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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