Modeling Sovereign Yield Spreads: A Case Study of Russian Debt

Authors

  • Darrell Duffie,

  • Lasse Heje Pedersen,

  • Kenneth J. Singleton

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    • * Duffie and Singleton are at the Graduate School of Business, Stanford University, and Pedersen is at the Stern School of Business, New York University. We thank Martin Jacobsen, Andrei Khinchuk, David Lando, Vladimir Semyonov, and Len Umantsev for discussions, as well as seminar participants at the Anderson School at UCLA, National Bureau of Economic Research, Princeton University, Stanford University, and Yale University. Pedersen gratefully acknowledges financial support from the Danish Research Academy and from Stanford University. All errors are our own.

Abstract

We construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring, and allows for compensation for illiquidity. Using a new and relatively efficient method, we estimate the model using Russian dollar-denominated bonds. We consider the determinants of the Russian yield spread, the yield differential across different Russian bonds, and the implications for market integration, relative liquidity, relative expected recovery rates, and implied expectations of different default scenarios.

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