Crisis dynamics of implied default recovery ratios: Evidence from Russia and Argentina |
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| Institution: | 1. University of Palermo, Palermo, Italy;2. University of Cyprus, Nicosia, Cyprus;3. Norwegian School of Economics, Norway;4. The Wharton Financial Institutions Center, The Wharton School, University of Pennsylvania, PA, USA;1. School of Economics, University of Nottingham, UK;2. Macroeconomic Policy and Financing for Development Division, United Nations ESCAP, Bangkok, Thailand;3. Economic Research Department, China Railway Party School, PR China |
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| Abstract: | This paper extracts both the implied default recovery ratio and the risk-neutral default probability term structure for Russian Federation and Republic of Argentina US dollar Eurobonds during the 1998 Russian default crisis. This crisis provides a unique window into the impact of changing default probabilities and recovery ratio assumptions on credit-sensitive sovereign bond prices. For the Russian Eurobonds, the sample paths suggest a two-phase crisis revaluation. Shifts in default probabilities account for most of the initial price collapse. Marked decreases in the implied default recovery ratio dominate the second phase. Investors never cut their recovery value assumptions for Argentine debt. |
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