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Revista Brasileira de Economia

Print version ISSN 0034-7140On-line version ISSN 1806-9134

Abstract

ROCHA, Katia; GARCIA, Francisco A. Alcaraz  and  TEIXEIRA, José Paulo. Term structure of sovereign spreads: a contingent claim model. Rev. Bras. Econ. [online]. 2007, vol.61, n.4, pp.519-533. ISSN 0034-7140.  http://dx.doi.org/10.1590/S0034-71402007000400005.

This paper proposes a simple structural model to estimate the termstructure and the implied default probability of a selected group of emerging countries, which account for 54% of the JPMorgan EMBIG index on average for the period 2000-2005. The real exchange rate dynamic, modeled as a pure diffusion process, is assumed to trigger default. The calibrated model generates sovereign spread curves consistent to market data. The results suggest that the market is systematically overpricing spreads for Brazil in 100 basis points, whereas for Mexico, Russia and Turkey the model is able to reproduce the market behavior.

Keywords : Emerging Markets; Sovereign Spreads; Structural Models; Default Probability.

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