Sovereign Default Risk Valuation: Implications of Debt Crises and Bond Restructurings Book

Introduction     1
Relevance of the Topic     3
Relevance for Global Investment     3
Relevance for Emerging Countries     5
Relevance in Academic Research     8
Research Subject and Methodology     9
Subject     9
Methodology     12
Structure     13
Sovereign Lending and Default     15
The pre-1990 Episode of Sovereign Lending     17
Infancy and the "Golden Age"     17
Bank Loans and Restructuring     19
The Brady Plan     21
The post-1990 Episode of Sovereign Lending     22
Mexico 1994-1995     28
The Asian Crisis 1996-1997     29
Russia 1997-1998     30
Brazil 1998-1999, 2002-2003     31
Pakistan 1998-1999     32
Ecuador 1998-1999     33
Ukraine 1998-2000     34
Turkey 2000-2001     35
Argentina 2000-2005     36
Uruguay 2001-2003     38
Moldova 2002     39
The Caribbean Restructurings 2005-2006     40
Outlook     41
The Theory of Sovereign Lending and Default     42
The Theory ofLending     43
Crisis Literature     45
The Literature on the IMF's Role     47
Empirical Evidence     49
Determinants of Crises     50
The Effect of IMF Involvement     52
Determinants of Ratings     54
Determinants of Spreads     55
Concluding Remarks     58
Sovereign Restructuring     61
Literature Review     62
Sovereign Bankruptcy Procedures     62
Analyzing Past Workouts     68
Crisis Resolution in a Nutshell     69
Liquidity and Solvency Crises     69
Debt Swap, Soft and Hard Restructurings     71
Evidence From Recent Restructurings     78
Features of Recent Restructurings     80
Resulting Present Value     88
Lessons for Investors     96
Investor Returns     96
Modeling the Recovery Value     101
Concluding Remarks     105
Modeling Sovereign Default Risk     109
Literature Review     110
Structural Models     111
Reduced Form Models     112
Recovery Schemes     116
Outlook     118
An Overture to Bond Analysis     119
The Money Market Account and the Discount Factor     119
The Price of a Risky Zero Bond     121
The Price of a Risky Coupon Bond     122
Yields, Spot and Forward Rates     124
Default Probability Functions     126
Bootstrap Analysis     127
Bond Duration and Average Life     129
Functional Forms of the Term Structure     131
Affine Models     132
Parsimonious Models     133
Discussion     141
Modeling Recovery     143
Recovery of Market Value     144
Mixed Recovery     145
Discussion     146
Empirical Implementation     147
Concluding Remarks     150
Empirical Estimations     153
Empirical Model Comparison     154
The Nelson-Siegel Model     154
Two-factor Nelson-Siegel With RFV     159
The Weibull Model With RFV     163
The Gumbel Model With RFV     168
The Lognormal Model With RFV     171
Discussion     176
Results From Other Countries     177
Argentina     178
Colombia      183
Mexico     186
Turkey     191
Venezuela     194
Concluding Remarks     197
Credit Default Swaps     199
An Introduction to CDS     199
CDS Valuation     202
The CDS Basis     204
The Role of Recovery     206
Empirical Evidence From Brazil 2002-2003     211
Preliminary Data Analysis     211
No Arbitrage With Two Instruments     214
No Arbitrage With Three Instruments     217
Concluding Remarks     220
Conclusion     223
References     229