Emerging market debt: measuring credit quality and examining relative pricing

We investigate the pricing of 'Brady' bonds that are issued by the governme nts of five developing countries as part of debt and debt service reduction agreements. We first present a measure of credit quality that takes accoun t of the individual features of each bond and is comparable across bonds, a cross issuers, and over time. We then examine the evolution of the credit q uality of each debt instrument from 1990 until the beginning of 2000. Next, we present evidence of a profitable trading strategy that exploits the inf ormation contained in this measure of credit quality. (C) 2001 Elsevier Sci ence Ltd. All rights reserved.