The Term Structure of Country Risk and Valuation in Emerging Markets

Topics:
Investment and Capital Markets
Tags:
American University,
Paris,
Marketing Research,
Marketing,
Investment,
Financial Services,
Finance,
Emerging Market,
Bond,
Valuation
Source:
American University of Paris

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Overview: The prevailing valuation technique in Emerging Markets adds the country risk to the discount rate. This practice ignores the term structure of default risk. The mismatch between the duration of the project being valued and the duration of the measure of country risk used leads to an overvaluation (undervaluation) of long-term projects when the term structure of default risk is upward (downward) sloping. Using sovereign bond data from five Emerging Markets, the paper estimates a model that captures the variation of expected collection at different horizons at one point in time, which can be used to solve the misestimating problem.

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Format: PDF | Size: 151KB | Date: Dec 2002 | Pages: 40

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