Estimating Implied Default Probabilities and Recovery Values: The Case of Greece During the 2010 European Debt Crisis
Evert B. Vrugt
VU University Amsterdam, PGO-IM
June 25, 2010
This paper develops a framework to estimate implied recovery values and risk-neutral default probability term-structures from sovereign bond prices. The model is applied to Greek bonds during the European debt crisis of 2010. In April and May 2010, the probability of a Greek default quickly rises from 5% to 40%. On Monday 10 May 2010, after EU finance ministers, the ECB and the IMF agree on a EUR 750 billion EU-wide rescue package, the default probability drops instantaneously below 10%. The implied recovery value remains between 40 and 60 cents on the euro and does not get revised materially during this period.
Number of Pages in PDF File: 18
Date posted: June 26, 2010
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