Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/220224
Authors: 
Rocha, Katia
García, Francisco Augusto Alcaraz
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper No. 135
Abstract: 
This paper proposes a simple structural model to estimate the term structure of sovereign spreads and the implied default probability of a selected group of emerging countries, which accounts for more than 50% of the J. P. Morgan EMBIG index. The real exchange rate dynamics, modeled as a pure diffusion process, are assumed to trigger default event. By relaxing the hypothesis of market completeness, the calibrated model generates sovereign spread curves consistent with market data, giving average deviations below 30 (Mexico, Russia and Turkey) or 60 (Brazil) basis points over time. We show the robustness of the model and argue that the criticism of structural models for underestimating the magnitude of market spreads should be reconsidered. The results suggest that the market tends to overprice the spreads for Brazil, whereas for Mexico, Russia and Turkey the model reproduces the market behavior.
JEL: 
G13
G15
F34
G33
Document Type: 
Working Paper

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