Brady Bonds and Default Probabilities

Ivailo Izvorski

No 1998/016, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; default probability; default; bond; price; Brady bonds; default probabilities; sovereign riskiness; Brady bond issuer; discount Brady bonds; probability of default; default probabilities Index; Bonds; Collateral; Yield curve; Asset prices; Treasury bills and bonds; Eastern Europe (search for similar items in EconPapers)
Pages: 24
Date: 1998-02-01
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1998/016

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