Risk Assessments and Risk Premiums in the Eurodollar Market

Authors

  • GERSHON FEDER,

  • KNUD ROSS

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    • World Bank and Bergen Bank, respectively. The views expressed in this paper are those of the authors, and do not necessarily represent the World Bank or its affiliated institutions. The authors benefited from useful discussions with T. N. Srinivasan and M. Hartley, as well as from the comments of R. Dornbusch. M. Parthasarathy assisted with the computations, and V. Lake provided valuable editorial assistance.

ABSTRACT

Increasing awareness of the potential risks involved in lending to heavily indebted governments focuses attention on credit pricing in the Eurodollar market. This paper utilizes a recent survey of country-by-country risk assessments as perceived by lenders to show that a systematic relationship exists between these assessments and interest rates in the Euromarket. The relationship is derived from an underlying model described in the paper. The estimated parameters verify a number of hypotheses, providing insights on the loss rates lenders expect to incur in case of default.

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