Analyzing structural change in the secondary market for developing-country debt: a translog approach

Abstract

This paper examines changes in the relative price relationships between Latin American external debt instruments with the use of a translogarithmic utility function. An examination of price and external debt data for five heavily indebted Latin American countries over the period January 1986 to December 1993 suggests that the Brady Plan probably affected the portfolio diversification decisions ofinvestors in developing-country externaldebt instruments by accelerating the return of Argentina, Brazil, Mexico and Venezuela to international credit worthiness. This study found that as a result of improved credit ratings and the resulting structural change in the secondary market for developing country debt, the external-debt instruments offour offive Latin American debtor countries examined in this study tended to become more substitutable with each other when held in a weakly separable portfolio.