Default Recovery Values and Implied Default Probabilities Estimations: Evidence from the Argentinean Crisis
AbstractThis paper estimates both the default recovery values and the risk-neutral default probabilities embedded in the argentine sovereign bond prices during the crisis of December 2001. It is applied the model presented by J. Merrick Jr. (2001). On De- cember 24th, a stand-in president announced the countrys in- solvency. It arises from the estimations that from October 19th to that time, the default recovery values descended from USD 40.9 for each USD 100 face value to USD 20.8 whereas the de- fault probabilities registered an increase from 13.3% to 45.5%. Thus, both determinants become relevant in explaining the down- ward trend of the average bond prices, falling from USD 58.3 to USD 26.5. Comparing estimated and market recovery values it emerges that, bond market prices were overvalued by USD 4.7 on average, which amounts to 21.7%.Then, the estimations are compared with those generated by Merrick (2001) for Argentina and Russia during August 1998. Assuming an Argentinean debt haircut set it at 70% of the promised face value and an estimated average recovery value which amounts to USD 21.7, Argentina would have overcome its default paying a country risk premium of around 1960 basic points. This result after debt restructuring would fully justify a substantial haircut over the face value, the bond temporal term structures and interest rate coupons.
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Bibliographic InfoPaper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 05-21.
Length: 27 pages
Date of creation: 2005
Date of revision:
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Fons, Jerome S, 1987. " The Default Premium and Corporate Bond Experience," Journal of Finance, American Finance Association, vol. 42(1), pages 81-97, March.
- Jochen R. Andritzky, 2004. "Implied Default Probabilities and Default Recovery Ratios: An Analysis of Argentine Eurobonds 2000-2002," Econometric Society 2004 Far Eastern Meetings 500, Econometric Society.
- Merrick Jr., John J., 2001. "Crisis dynamics of implied default recovery ratios: Evidence from Russia and Argentina," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1921-1939, October.
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