Default Recovery Rates and Implied Default Probability Estimations: Evidence from the Argentinean Crisis
AbstractThis paper applies the model presented by J. Merrick Jr. (2001) to estimate both the default recovery rates and the implied default probabilities of the Argentinean Sovereign Bonds during the crisis which took place in December 2001. Between October 19th and December 24th 2001, the average bond price level re�ected a downward trend, falling from USD 56.8 to USD 26.5 for each USD 100 face value. Similarly, default recovery rates descended from USD 38.7 to USD 20.8 whereas the base default probability registered an increase from 19.4% to 45.5%. Thus, bond price volatility could be explained in terms of these two embedded determinants. According to the model, bond prices were overvalued by USD 3.92 on average, which amounts to 12.9%; even when it is generally assumed that the default was foreseen by the market in December 2001. In accordance with private estimations of the Argentinean debt haircut which set it at 70% and the recovery rate estimated by the model which amounts to USD 21.7, Argentina would have overcome its default with a country risk premium of around 1960 basic points. Such a high country risk spread after debt restructuring would fully justify a deep haircut over the face value, the temporal term structure and interest rate coupons.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 11054.
Date of creation: Jan 2005
Date of revision:
Sovereign Default; Recovery Estimates;
Find related papers by JEL classification:
- G1 - Financial Economics - - General Financial Markets
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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.:
- Edward Altman & Andrea Resti & Andrea Sironi, 2004. "Default Recovery Rates in Credit Risk Modelling: A Review of the Literature and Empirical Evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(2), pages 183-208, 07.
- Fons, Jerome S, 1987. " The Default Premium and Corporate Bond Experience," Journal of Finance, American Finance Association, vol. 42(1), pages 81-97, March.
- Jonkhart, Marius J. L., 1979. "On the term structure of interest rates and the risk of default : An analytical approach," Journal of Banking & Finance, Elsevier, vol. 3(3), pages 253-262, September.
- Fathi, Abid & Nader, Naifar, 2007. "Price Calibration of basket default swap: Evidence from Japanese market," MPRA Paper 6013, University Library of Munich, Germany.
- Guillard, Michel & Sosa Navarro, Ramiro, 2009. "Fiscal Imbalances, Inflation and Sovereign Default Dynamics," MPRA Paper 24075, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.