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

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  • John J. Merrick Jr.

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

  • John J. Merrick Jr., 1999. "Crisis Dynamics of Implied Default Recovery Ratios: Evidence From Russia and Argentina," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-052, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:99-052
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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99052.pdf
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    Cited by:

    1. Juan Jose Cruces & Marcos Buscaglia & Joaquin Alonso, 2002. "The Term Structure of Country Risk and Valuation in Emerging Markets," Working Papers 46, Universidad de San Andres, Departamento de Economia, revised Apr 2002.
    2. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    3. Clark, Ephraim & Lakshmi, Geeta, 2004. "Sovereign debt and the cost of migration: India 1990-1992," Journal of Asian Economics, Elsevier, vol. 15(1), pages 111-134, February.
    4. Ephraim Clark & Geeta Lakshmi, 2003. "Controlling the risk: a case study of the Indian liquidity crisis 1990-92," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 285-298.
    5. Federico Sturzenegger, 2002. "Defaults in the 90´s: Factbook and Preliminary Lessons," Business School Working Papers veintidos, Universidad Torcuato Di Tella.

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