The Term Structure of Country Risk and Valuation in Emerging Markets

Juan Jose Cruces, Marcos Buscaglia and Joaquin Alonso
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Juan Jose Cruces: Department of Economics, Universidad de San Andres
Marcos Buscaglia: IAE
Joaquin Alonso: Mercado Abierto S.A.

No 46, Working Papers from Universidad de San Andres, Departamento de Economia

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.

Keywords: Emerging Economies; Cost of Capital; Default Risk (search for similar items in EconPapers)
JEL-codes: G15 G31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2002-01, Revised 2002-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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https://webacademicos.udesa.edu.ar/pub/econ/doc46.pdf Revised version, 2002 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:sad:wpaper:46

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