02577cas a2200265 a 4500 AALejournalIMF006394 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451982770 1018-5941 BD-DhAAL BD-DhAAL Martinez, Leonardo. Quantitative properties of sovereign default models : solution methods matter / Leonardo Martinez, Horacio Sapriza, Juan Carlos Hatchondo. Washington, D.C. : International Monetary Fund, 2010. 1 online resource (28 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interest rate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borrowing level for the borrowing levels that are observed more frequently in the simulations. In addition, we find that the efficiency of the discrete state space technique can be greatly improved by (i) finding the equilibrium as the limit of the equilibrium of the finite-horizon version of the model, instead of iterating separately on the value and bond price functions and (ii) concentrating grid points in asset levels at which the bond price is more sensitive to the borrowing level and in levels that are observed more often in the model simulations. Our analysis questions the robustness of results in the sovereign default literature and is also relevant for the study of other credit markets. Mode of access: Internet Hatchondo, Juan Carlos. Sapriza, Horacio. IMF Working Papers; Working Paper ; No. 2010/100 Full text available on IMF http://elibrary.imf.org/view/journals/001/2010/100/001.2010.issue-100-en.xml IMF e-Library