33 Pages Posted: 7 May 2015 Last revised: 3 Nov 2015
Date Written: October 30, 2015
What determines the recovery of sovereign bond holders in the face of a credit event? This paper studies empirical determinants for sovereign recovery risk. Guided by theoretically backed hypotheses we use a sample of 102 past restructurings and empirically test the relation between haircut sizes and their economic drivers. We find a significant linkage of the haircut size to a debtor's ability to repay as well as his willingness. Distinguishing between excusable and strategic defaulters in a new way enables us to empirically show that punishment is of markedly increased effectiveness amongst the strategic cohort. Based on these results we develop a forecasting-model for predicting haircuts conditional on the restructurings taking place within the year ahead and assess the performance of the model by applying it to a sample of the 45 restructurings observed from 1991 to present.
Keywords: sovereign debt, sovereign recovery risk
JEL Classification: F34, G15, H63
Suggested Citation: Suggested Citation