Sovereign default risk valuation : implications of debt crises and bond restructurings / Jochen Andritzky.

Format:

Book

Thesis/Dissertation

Author/Creator:

Andritzky, Jochen R.

Series:

Lecture notes in economics and mathematical systems ; 582.

Lecture notes in economics and mathematical systems ; 582

Language:

English

Subjects (All):

Government securities--Valuation--Developing countries--Mathematical models.

Government securities.

Financial risk--Developing countries--Mathematical models.

Financial risk.

Debts, Public--Developing countries.

Debts, Public.

Default (Finance).

Mathematical models.

Valuation.

Developing countries.

Default (Finance)--Developing countries.

Genre:

Academic theses.

Physical Description:

xi, 251 pages : illustrations ; 24 cm.

Place of Publication:

Berlin ; New York : Springer, [2006]

Summary:

Past cycles of sovereign lending and default in emmerging markets suggest that debt crises will recur at some point. In addressing debt crises it has proven helpful to distinguish between situations of illiquidity and insolvency. Solutions range from a voluntary debt swap to a soft or hard restructuring. This book shows why investors should reckon with similar credit events in the future.

Insights gained from recent restructurings inspire the design of a valuation model for sovereign bonds. Using the distinction between hard and soft restructurings, the model draws parallels to the concepts of face value and market value recovery. An extension into credit default swap markets explains why bond and CDS spreads diverge during distress. This survey of the sovereign bond market provides investors with a useful toolkit for analyzing sovereign bonds and foreseeing trends in the international financial architecture. The result should be a better understanding of debt crises and more deliberate investment decisions.

Contents:

1.1 Relevance of the Topic 3

1.1.1 Relevance for Global Investment 3

1.1.2 Relevance for Emerging Countries 5

1.1.3 Relevance in Academic Research 8

1.2 Research Subject and Methodology 9

1.2.1 Subject 9

1.2.2 Methodology 12

1.2.3 Structure 13

2 Sovereign Lending and Default 15

2.1 The pre-1990 Episode of Sovereign Lending 17

2.1.1 Infancy and the "Golden Age" 17

2.1.2 Bank Loans and Restructuring 19

2.1.3 The Brady Plan 21

2.2 The post-1990 Episode of Sovereign Lending 22

2.2.1 Mexico 1994-1995 28

2.2.2 The Asian Crisis 1996-1997 29

2.2.3 Russia 1997-1998 30

2.2.4 Brazil 1998-1999, 2002-2003 31

2.2.5 Pakistan 1998-1999 32

2.2.6 Ecuador 1998-1999 33

2.2.7 Ukraine 1998-2000 34

2.2.8 Turkey 2000-2001 35

2.2.9 Argentina 2000-2005 36

2.2.10 Uruguay 2001-2003 38

2.2.11 Moldova 2002 39

2.2.12 The Caribbean Restructurings 2005-2006 40

2.2.13 Outlook 41

2.3 The Theory of Sovereign Lending and Default 42

2.3.1 The Theory of Lending 43

2.3.2 Crisis Literature 45

2.3.3 The Literature on the IMF's Role 47

2.4 Empirical Evidence 49

2.4.1 Determinants of Crises 50

2.4.2 The Effect of IMF Involvement 52

2.4.3 Determinants of Ratings 54

2.4.4 Determinants of Spreads 55

3 Sovereign Restructuring 61

3.1 Literature Review 62

3.1.1 Sovereign Bankruptcy Procedures 62

3.1.2 Analyzing Past Workouts 68

3.2 Crisis Resolution in a Nutshell 69

3.2.1 Liquidity and Solvency Crises 69

3.2.2 Debt Swap, Soft and Hard Restructurings 71

3.3 Evidence From Recent Restructurings 78

3.3.1 Features of Recent Restructurings 80

3.3.2 Resulting Present Value 88

3.4 Lessons for Investors 96

3.4.1 Investor Returns 96

3.4.2 Modeling the Recovery Value 101

4 Modeling Sovereign Default Risk 109

4.1 Literature Review 110

4.1.1 Structural Models 111

4.1.2 Reduced Form Models 112

4.1.3 Recovery Schemes 116

4.1.4 Outlook 118

4.2 An Overture to Bond Analysis 119

4.2.1 The Money Market Account and the Discount Factor 119

4.2.2 The Price of a Risky Zero Bond 121

4.2.3 The Price of a Risky Coupon Bond 122

4.2.4 Yields, Spot and Forward Rates 124

4.2.5 Default Probability Functions 126

4.2.6 Bootstrap Analysis 127

4.2.7 Bond Duration and Average Life 129

4.3 Functional Forms of the Term Structure 131

4.3.1 Affine Models 132

4.3.2 Parsimonious Models 133

4.4 Modeling Recovery 143

4.4.1 Recovery of Market Value 144

4.4.2 Mixed Recovery 145

4.5 Empirical Implementation 147

5 Empirical Estimations 153

5.1 Empirical Model Comparison 154

5.1.1 The Nelson-Siegel Model 154

5.1.2 Two-factor Nelson-Siegel With RFV 159

5.1.3 The Weibull Model With RFV 163

5.1.4 The Gumbel Model With RFV 168

5.1.5 The Lognormal Model With RFV 171

5.2 Results From Other Countries 177

5.2.1 Argentina 178

5.2.2 Colombia 183

5.2.3 Mexico 186

5.2.4 Turkey 191

5.2.5 Venezuela 194

6 Credit Default Swaps 199

6.1.1 CDS Valuation 202

6.1.2 The CDS Basis 204

6.1.3 The Role of Recovery 206

6.2 Empirical Evidence From Brazil 2002-2003 211

6.2.1 Preliminary Data Analysis 211

6.2.2 No Arbitrage With Two Instruments 214

6.2.3 No Arbitrage With Three Instruments 217.

Notes:

Originally presented as the author's doctoral thesis (Universität, St. Gallen, 2006).

Includes bibliographical references.

ISBN:

3540374485

9783540374480

OCLC:

74270312