Estimating a Risky Term Structure of Uruguayan Sovereign Bonds

Serafin Frache and Gabriel Katz
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Gabriel Katz: Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República

No 304, Documentos de Trabajo (working papers) from Department of Economics - dECON

Abstract: Based on a joint three - factor affine 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 experie

Keywords: default risk; term structure; reduced-form model; default spread (search for similar items in EconPapers)
JEL-codes: C1 C51 F34 G12 G15 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-05
New Economics Papers: this item is included in nep-fin and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:ude:wpaper:0304

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