Sovereign Rating Transitions And The Price Of Default Risk In Emerging Markets

Alena Audzeyeva and Klaus Reiner Schenk-Hoppé ()
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Alena Audzeyeva: University of Leeds, Business School

No 07-18, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper introduces an expected value estimator with “expert knowledge” to the robust estimation of sovereign rating transitions which are characterised by few observations. Our estimates of default premia within Mexican, Colombian and Brazilian Eurobond yield spreads provide a better fit than ‘cohort’ and continuous-time observation approaches. The analysis suggests that default risk accounted for a rather small share (decreasing with maturity) of the yield spreads for non-investment grade Colombian and Brazilian Eurobonds in 2003. This share increased while yield spreads fell during 2003-2005 mainly due to non-default risk factors. Default and liquidity premia for investment-grade Mexican spreads both decreased at similar rates.

Keywords: Emerging markets; sovereign default; rating transitions; yield spreads; default premia (search for similar items in EconPapers)
JEL-codes: G15 C11 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: 2007-05

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Persistent link: http://EconPapers.repec.org/RePEc:chf:rpseri:rp0718

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