Estimating the likelihood of Mexican default from the market prices of brady bonds

Stijn Claessens, George Pennacchi

Research output: Contribution to journalArticlepeer-review


Market prices of developing country debt reflect investors' views of country repayment capacity as well as other debt-specific factors. To extract a measure of repayment capacity from debt prices, adjustments need to be made to account for: debt values being a concave function of repayment capacity; the specific terms of the debt agreement; and the presence of third-party guarantees. This paper derives a measure of repayment capacity by constructing a pricing model that takes these factors into account. Applying the model to Brady bonds issued by Mexico, we find that estimated repayment capacity often performs differently from the unadjusted bond prices. We demonstrate that other Mexican bonds can be priced fairly accurately on the basis of this repayment capacity measure.

Original languageEnglish (US)
Pages (from-to)109-126
Number of pages18
JournalJournal of Financial and Quantitative Analysis
Issue number1
StatePublished - Mar 1996

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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