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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page What Did the Credit Market Expect of Argentina Default? Evidence from Default Swap Data
Frank X. Zhang

Abstract: This article explores the expectations of the credit market by developing a parsimonious default swap model, which is versatile enough to disentangle default probability from the expected recovery rate, accommodate counterparty default risk, and allow flexible correlation between state variables. We implements the model to a unique sample of default swaps on Argentine sovereign debt, and found that the risk-neutral default probability was always higher than its physical counterpart, and the wedge between the two was affected by changes in the business cycle, the U.S. and Argentine credit conditions, and the overall strength of the Argentine economy. We also found that major rating agencies had assigned over-generous ratings to the Argentine debt, and they lagged the market in downgrading the debt.

Keywords: Credit, default, swap, sovereign, debt

Full paper (461 KB PDF)

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Last update: July 22, 2003