Since 2014
Extracting Default Probabilities from Sovereign Bonds
Brazilian Review of Econometrics
View Archive Info| Field | Value | |
| Title |
Extracting Default Probabilities from Sovereign Bonds
Extracting Default Probabilities from Sovereign Bonds |
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| Creator |
Meres, Bernardo
Almeida, Caio |
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| Description |
Sovereign risk analysis is central in debt markets. Considering different bonds and countries, there are numerous measures aiming to identify the way risk is perceived by market participants. In such environment, probabilities of default play a central role in investors’ decisions. This article contributes by providing a parametric arbitrage-free dynamic model to estimate defaultable term structures of sovereign bonds. The proposed model builds on Duffie and Singleton’s (1999) general reduced-form model by proposing a piecewise constant structure for the conditional probabilities of defaults. Once an average recovery rate value is fixed for the whole market, the proposed model estimates implied probabilities of defaults from bond prices, working as a parsimonious tool to quantify investor’s perception of credit risk. We apply this methodology to analyze the behavior of default probabilities within the Brazilian sovereign fixed income market at three different recent economic moments.
Sovereign risk analysis is central in debt markets. Considering different bonds and countries, there are numerous measures aiming to identify the way risk is perceived by market participants. In such environment, probabilities of default play a central role in investors’ decisions. This article contributes by providing a parametric arbitrage-free dynamic model to estimate defaultable term structures of sovereign bonds. The proposed model builds on Duffie and Singleton’s (1999) general reduced-form model by proposing a piecewise constant structure for the conditional probabilities of defaults. Once an average recovery rate value is fixed for the whole market, the proposed model estimates implied probabilities of defaults from bond prices, working as a parsimonious tool to quantify investor’s perception of credit risk. We apply this methodology to analyze the behavior of default probabilities within the Brazilian sovereign fixed income market at three different recent economic moments. |
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| Publisher |
Sociedade Brasileira de Econometria
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| Date |
2008-05-01
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion |
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| Format |
application/pdf
application/pdf |
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| Identifier |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/1518
10.12660/bre.v28n12008.1518 |
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| Source |
Brazilian Review of Econometrics; Vol. 28 No. 1 (2008); 77-94
Brazilian Review of Econometrics; v. 28 n. 1 (2008); 77-94 1980-2447 |
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| Language |
eng
por |
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| Relation |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/1518/944
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/1518/945 |
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