Premium
ESTIMATING A RISKY TERM STRUCTURE OF BRADY BONDS
Author(s) -
KESWANI ANEEL
Publication year - 2005
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2005.00463.x
Subject(s) - economics , bond , econometrics , goodness of fit , sample (material) , term (time) , bond market , financial crisis , financial economics , monetary economics , statistics , mathematics , macroeconomics , finance , physics , quantum mechanics , chemistry , chromatography
We compare the performance of a structural and a reduced form default risky bond pricing model for Brady bonds from different countries. Goodness of fit statistics indicate comparable in‐sample model performance whilst our out‐of‐sample tests favour the reduced form model. We also find evidence that a decrease in US interest rates is associated with larger sovereign spreads, consistent with flights‐to‐quality at times of financial crisis. We test for a common factor driving default probabilities across countries, using our reduced form model. We find that this factor is statistically significant indicating the presence of contagion effects in this market.