18 Pages Posted: 26 Jun 2010
Date Written: 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.
Suggested Citation: 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