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Estimating Implied Default Probabilities and Recovery Values: The Case of Greece During the 2010 European Debt Crisis

18 Pages Posted: 26 Jun 2010  

Evert B. Vrugt

VU University Amsterdam, PGO-IM

Date Written: June 25, 2010

Abstract

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.

Suggested Citation

Vrugt, Evert B., Estimating Implied Default Probabilities and Recovery Values: The Case of Greece During the 2010 European Debt Crisis (June 25, 2010). Available at SSRN: https://ssrn.com/abstract=1630525 or http://dx.doi.org/10.2139/ssrn.1630525

Evert B. Vrugt (Contact Author)

VU University Amsterdam, PGO-IM ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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