The Dynamics of the Option-Adjusted Spread of Brady Bond Securities
Main Article Content
Abstract
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.
Article Details
Issue
Section
Long Paper
Authors that publish in the Brazilian Review of Finance agree with the following terms:
Authors maintain their moral rights and grant to Review the copyright and the first publication right with their work simultaneously licensed under a Creative Commons Attribution 3.0 License that allows the total or partial copy of the work, including for commercial use, and sharing of the work with recognition of its authors and the initial publication in this journal.
Authors are allowed to take additional contracts separately for non-exclusive distribution of the paper published in this journal (eg, in institutional repositories or to publish as a book chapter), with recognition of its authors and the initial publication in this journal.
Authors are permitted and encouraged to post their work online (eg, in institutional repositories or on their website) at any point before or during the submission process, as this can lead to productive exchanges, as well as increase the impact and citation of the published work.
The contents of the signed articles are the sole responsibility of the authors, remains their responsibility even after the transfer of the copyright. The Review reserves the right to make normative, spelling and grammar changes in the original article in order to maintain the linguistic standards, but will follow the style of the authors. RBFin also reserves the right to translate the article into another language. RBFin may impose a copyright transfer form as a condition for publishing the article.
