Discussion paper
DP2866 Emerging Market Debt: Measuring Credit Quality and Examining Relative Pricing
We investigate the pricing of ?Brady? bonds that are issued by the governments of five developing
countries as part of debt and debt service reduction agreements. We first present a measure of credit
quality that takes account of the individual features of each bond and is comparable across bonds,
across issuers, and over time. We then examine the evolution of the credit quality of each debt
instrument from 1990 until the beginning of 2000. Next, we present evidence of a profitable trading
strategy that exploits the information contained in this measure of credit quality.
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