DP2866 Emerging Market Debt: Measuring Credit Quality and Examining Relative Pricing

Author(s): Robert Cumby, Tuvana Pastine
Publication Date: June 2001
Keyword(s): brady bonds, default risk, market efficiency, mispricing, sovereign debt
JEL(s): F32, F34, G14, G15
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2866

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.