Sovereign Default Risk and Recovery Rates: What Government Bond Markets Expect for Greece

17 Pages Posted: 24 Aug 2012

See all articles by Alexander Karmann

Alexander Karmann

Dresden University of Technology - Faculty of Economics and Business Management

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: September 2012

Abstract

Bond market data on sovereign bond yields is used to estimate sovereign default risk and the amount of the expected “hair‐cut” for Greece between 2008 and 2011. Using a structural pricing model that relies on compound option theory short‐term and long‐term default probabilities and their dependencies can be inferred. Thereby bond yield spreads for different maturities are integrated. In addition, a reduced form model is applied to infer the recovery rate expected by bond market participants. The paper shows that sovereign default risk and recovery rate dynamics reflect events that are important for Greece's repayment capacity.

Suggested Citation

Karmann, Alexander J. and Maltritz, Dominik, Sovereign Default Risk and Recovery Rates: What Government Bond Markets Expect for Greece (September 2012). Review of International Economics, Vol. 20, Issue 4, pp. 723-739, 2012. Available at SSRN: https://ssrn.com/abstract=2135365 or http://dx.doi.org/10.1111/j.1467-9396.2012.01049.x

Alexander J. Karmann (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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