The Dynamics of the Option-Adjusted Spread of Brady Bond Securities
Brady bond securities represent a substantial fraction of emerging markets countries internationally tradable sovereign debt. The credit risk spread above and beyond the U.S. treasury curve for these securities is usually large in size and volatility. Moreover, most Brady bonds carry embedded option...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Brazilian Society of Finance
2003-06-01
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| Series: | Revista Brasileira de Finanças |
| Subjects: | |
| Online Access: | http://virtualbib.fgv.br/ojs/index.php/rbfin/article/view/1126 |
| _version_ | 1828292660570357760 |
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| author | Luiz Otavio Calôba Franklin de O. Gonçalves |
| author_facet | Luiz Otavio Calôba Franklin de O. Gonçalves |
| author_sort | Luiz Otavio Calôba |
| collection | DOAJ |
| description | Brady bond securities represent a substantial fraction of emerging markets countries internationally tradable sovereign debt. The credit risk spread above and beyond the U.S. treasury curve for these securities is usually large in size and volatility. Moreover, most Brady bonds carry embedded options that lead to the existence of an Option-Adjusted Spread, OAS, which increase their risk profiles. In this paper we present an empirical study of the dynamics of Brady bonds OAS using a heath, Jarrow and Morton term structure pricing model. The dynamics of the spread shows that the proper risk management and pricing of these securities require the consideration of volatility in addition to the magnitude of the sovereign risk spread. That is, the proper risk measure for these securities would be the pair (OAS, OAS Volatility). A study of implied default probabilities is also presented. Our analysis is illustrated with bonds from Brazil, Argentina, Mexico, Poland, Bulgaria and the Philippines. |
| first_indexed | 2024-04-13T11:11:10Z |
| format | Article |
| id | doaj.art-a50edc3e0c054845bfa8ef8b035d0309 |
| institution | Directory Open Access Journal |
| issn | 1679-0731 1984-5146 |
| language | English |
| last_indexed | 2024-04-13T11:11:10Z |
| publishDate | 2003-06-01 |
| publisher | Brazilian Society of Finance |
| record_format | Article |
| series | Revista Brasileira de Finanças |
| spelling | doaj.art-a50edc3e0c054845bfa8ef8b035d03092022-12-22T02:49:06ZengBrazilian Society of FinanceRevista Brasileira de Finanças1679-07311984-51462003-06-011189112The Dynamics of the Option-Adjusted Spread of Brady Bond SecuritiesLuiz Otavio CalôbaFranklin de O. GonçalvesBrady bond securities represent a substantial fraction of emerging markets countries internationally tradable sovereign debt. The credit risk spread above and beyond the U.S. treasury curve for these securities is usually large in size and volatility. Moreover, most Brady bonds carry embedded options that lead to the existence of an Option-Adjusted Spread, OAS, which increase their risk profiles. In this paper we present an empirical study of the dynamics of Brady bonds OAS using a heath, Jarrow and Morton term structure pricing model. The dynamics of the spread shows that the proper risk management and pricing of these securities require the consideration of volatility in addition to the magnitude of the sovereign risk spread. That is, the proper risk measure for these securities would be the pair (OAS, OAS Volatility). A study of implied default probabilities is also presented. Our analysis is illustrated with bonds from Brazil, Argentina, Mexico, Poland, Bulgaria and the Philippines.http://virtualbib.fgv.br/ojs/index.php/rbfin/article/view/1126pricing interest rate derivativescredit riskrisk managementterm structure modelsBrady bonds |
| spellingShingle | Luiz Otavio Calôba Franklin de O. Gonçalves The Dynamics of the Option-Adjusted Spread of Brady Bond Securities Revista Brasileira de Finanças pricing interest rate derivatives credit risk risk management term structure models Brady bonds |
| title | The Dynamics of the Option-Adjusted Spread of Brady Bond Securities |
| title_full | The Dynamics of the Option-Adjusted Spread of Brady Bond Securities |
| title_fullStr | The Dynamics of the Option-Adjusted Spread of Brady Bond Securities |
| title_full_unstemmed | The Dynamics of the Option-Adjusted Spread of Brady Bond Securities |
| title_short | The Dynamics of the Option-Adjusted Spread of Brady Bond Securities |
| title_sort | dynamics of the option adjusted spread of brady bond securities |
| topic | pricing interest rate derivatives credit risk risk management term structure models Brady bonds |
| url | http://virtualbib.fgv.br/ojs/index.php/rbfin/article/view/1126 |
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