Modelling the Uruguayan debt through gaussians models

TL;DR

This paper develops Gaussian models to accurately fit and price Uruguayan sovereign bonds in USD, providing a method to estimate prices and derivatives despite market illiquidity.

Contribution

It introduces a Gaussian modeling approach for Uruguayan bond prices, enabling non-arbitrage pricing of traded and non-traded instruments using historical data.

Findings

Good fit of Gaussian models to bond data

Enables pricing of non-traded bonds and derivatives

Addresses market illiquidity issues

Abstract

We model bond's price curves corresponding to the sovereign uruguayan debt nominated in USD, as an alternative to the official bond prices publication released by the Central Bank of Uruguay (CBU). Four different gaussian models are fitted, based on historical data issued by the CBU, corresponding to some of the more frequently traded bonds. The main difficulty we approach is the absence of liquidity in the bond market. Nevertheless the adjustment is relatively good, giving the possibility of non-arbitrage pricing of the whole family of non traded instruments, and also the possibility of pricing derivative securities.