Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996

Posted: 17 Sep 1996

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

George Pennacchi

University of Illinois

Abstract

Market prices of developing country debt reflect investors' views of country repayment capacity as well as other debt-specific factors. To extract a measure of repayment capacity from debt prices, adjustments need to be made to account for: debt values being a concave function of repayment capacity; the specific terms of the debt agreement; and the presence of third-party guarantees. This paper derives a measure of repayment capacity by constructing a pricing model that takes these factors into account. Applying the model to Brady bonds issued by Mexico, we find that estimated repayment capacity often performs differently from the unadjusted bond prices. We demonstrate that other Mexican bonds can be priced fairly accurately on the basis of this repayment capacity measure.

JEL Classification: G15

Suggested Citation

Claessens, Stijn and Pennacchi, George G., Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996. Available at SSRN: https://ssrn.com/abstract=7736

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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