Review of Economics
Jahrbuch für Wirtschaftswissenschaften
Editor-in-Chief: Berlemann, Michael
Ed. by Haucap, Justus / Thum, Marcel
3 Issues per year
A Structural Approach to Estimate Short-Term and Long-Term Country Default Risk from Market Data: The Case of Argentina 2000/2001
We apply a structural pricing model to bond market data in order to estimate the default risk for Argentina in 2000/2001. The model explicitly considers short-term and long-term debt service payments and their dependencies by employing compound option theory. In this way, it is possible to take into account both the empirically observed dependency between the term structure of bond spreads and the default risk as well as the finding that the ratio of short-term to long-term debt is of special importance for default risk. The model parameters are estimated using Duan’s (1994) time series-based maximum likelihood approach.