A Structural Approach to Estimate Short-Term and Long-Term Country Default Risk from Market Data: The Case of Argentina 2000/2001

We apply a structural pricing model to bond market data in order to estimate the

default risk for Argentina in 2000/2001. The model explicitly considers short-term

and long-term debt service payments and their dependencies by employing compound

option theory. In this way, it is possible to take into account both the empirically

observed dependency between the term structure of bond spreads and the default risk

as well as the finding that the ratio of short-term to long-term debt is of special importance for default risk. The model parameters are estimated using Duan’s (1994) time series-based maximum likelihood approach.