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

35 Pages Posted: 11 Nov 2008  

John J. Merrick Jr.

College of William and Mary - Mason School of Business

Date Written: November 1999

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.

Suggested Citation

Merrick, John J., Crisis Dynamics of Implied Default Recovery Ratios: Evidence from Russia and Argentina (November 1999). NYU Working Paper No. FIN-99-052. Available at SSRN: https://ssrn.com/abstract=1298275

John J. Merrick Jr. (Contact Author)

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757-221-2721 (Phone)
757-221-2937 (Fax)

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