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Crisis Dynamics of Implied Default Recovery Ratios: Evidence From Russia and Argentina

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John J. Merrick Jr.
Abstract

The Russian GKO default crisis provides a unique window into the impact of changing default probabilities and recovery ratio assumptions on credit-sensitive sovereign bond prices. This paper introduces a joint implied parameter approach to extract both the expected recovery ratio and the default probability term structure. The methodology is applied to both Russian Federation and Republic of Argentina US dollar-denominated Eurobonds before and after the GKO crisis. For the Russian bonds, the sample paths suggest a two-phase revaluation. Shifts in default probabilities account for most of the initial price collapse. Marked decreases in the projected default recovery ratio dominate the continued Russian bond price declines. The "contagion effect" impact of the default crisis on the Argentine Eurobond market actually resembles the Russian case much more than the raw price data indicate. The crucial Argentine distinction is that investors never cut recovery value assumptions.

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Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-052.

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Date of creation: Nov 1999
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Handle: RePEc:fth:nystfi:99-052

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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Web page: http://w4.stern.nyu.edu/finance/
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Claessens, Stijn & Pennacchi, George, 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 109-126, March. [Downloadable!]
  2. Fons, Jerome S, 1987. " The Default Premium and Corporate Bond Experience," Journal of Finance, American Finance Association, vol. 42(1), pages 81-97, March. [Downloadable!] (restricted)
  3. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July. [Downloadable!] (restricted)
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  4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February. [Downloadable!] (restricted)
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  5. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June. [Downloadable!] (restricted)
  6. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 481-523.
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  1. Ephraim Clark & Geeta Lakshmi, 2003. "Controlling the risk: a case study of the Indian liquidity crisis 1990-92," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 285-298. [Downloadable!]
  2. Federico Sturzenegger, 2002. "Defaults in the 90´s: Factbook and Preliminary Lessons," Business School Working Papers veintidos, Universidad Torcuato Di Tella. [Downloadable!]
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