Predicting default probability and the default recovery ratio: evidence from the Lebanese external public debt

El Khoury, Ghada; Colmant, Bruno; Corhay, Albert

Download

Article (Scientific journals)

Predicting default probability and the default recovery ratio: evidence from the Lebanese external public debt

El Khoury, Ghada; Colmant, Bruno; Corhay, Albert

2009 • In Banks and Bank Systems, 4 (2)

Peer Reviewed verified by ORBi

Permalink
https://hdl.handle.net/2268/9510

Files (1)Send to Details Statistics Bibliography Similar publications

Files

Full Text

Predicting default probability-GhadaElKhoury.end.pdf

Publisher postprint (251.13 kB)

Download

All documents in ORBi are protected by a user license.

Send to

RIS BibTex APA Chicago Permalink X Linkedin

Details

Keywords :

implied default probability; recovery ratio; credit spread; sovereign debt; market price

Abstract :

[en] With a national debt exceeding 190% of the GDP at the end of 2006, the Lebanese government is in a difficult situation. The literature on emerging markets reveals the various causes that might lead to a default on their public debt. The first objective of this paper is to analyze the evolution of the credit spread for the Lebanese US Dollar Eurobonds. The second objective is to extract both the implied default recovery ratio and the risk neutral default probability term structure for the Lebanese US dollar Eurobonds between October 2001 and November 2004. Our results show that the recovery ratio is strongly related to the market reaction linked to political and economic tension within Lebanon. For the period after the Paris II conference in November 2002, the average estimates show a decline in the default probability for the long-term period accompanied by an increase in the default recovery ratio.

Research Center/Unit :

Centre de recherche d'HEC- école de gestion de l'université de Liège

Disciplines :

Finance

Author, co-author :

El Khoury, Ghada ; Université de Liège - ULiège > HEC-Ecole de gestion > HEC-Ecole de gestion

Colmant, Bruno

Corhay, Albert ; Université de Liège - ULiège > Services administratifs généraux > Comptabilité et finance - Vice-Recteur

Language :

English

Title :

Predicting default probability and the default recovery ratio: evidence from the Lebanese external public debt

Publication date :

2009

Journal title :

Banks and Bank Systems

ISSN :

1816-7403

eISSN :

1991-7074

Publisher :

Business Persepectives, Dzerzhynsky lane, Ukraine

Volume :

Issue :

Peer reviewed :

Peer Reviewed verified by ORBi

Name of the research project :

Particularité de la situation macro-économique au Liban: Evaluation du nouvel accord de Bâle II sur les fonds propres des banques libanaises et analyse critique de son effet sur l’exposition du système financier au risque de crédit.

Available on ORBi :

since 29 April 2010

Statistics

Number of views

300 (61 by ULiège)

Number of downloads

19 (9 by ULiège)

More statistics

Scopus citations^®

Scopus citations^®
without self-citations

Bibliography

Altman, E.I., Cooke, D., Kishore, V., 1999. "Defaults and returns on high yield bonds: Analysis through 1998 and default outlook for 1999-2001", New-York University Salomon Center.
Association des Banques au Liban, Rapports Annuels, (1995-2006).
Andritzky, J., 2002. Implied default probabilities and default recovery ratios: An analysis of the Argentine Crisis 2001/2002. Swiss Institute of Banking and Finance.
Ayoub, H., Raffinot, M., 2005. "Réforme fiscale et soutenabilité de la dette publique: Le cas du Liban".
Berardi, A., Ciraolo, S. and Trova, M. 2004. "Predicting Default Probabilities and Implementing Trading Strategies for Emerging Markets Bond Portfolios".
Bhannot, K., 1998. Recovery and implied default in brady bonds. The Journal of Fixed Income Vol. 8, No 1, pp. 47-51.
Bhannot, K., 2004. What causes mean reversion in corporate bond index spreads? The impact of survival. Journal of Banking and Finance.
Borio, C., Packer, F., Van den Bergh, P. Quarterly Review, March 2007. Bank of International Settlements.
Claessens, S. and Pennachi, G. 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds". Journal of Financial and Quantative Analysis.
Cohen, D. et Portes, D., 2003. Crises de la dette: Prévention et résolution. Conseils d'analyses économiques, 5.
Cole, Harold L. & Kehoe, Timothy J., 1996. "A Self-Fulfilling Model of Mexico's 1994-95 Debt Crisis." Federal Reserve Bank of Minneapollis, Research Department Staff Report 210.
Cole, Harold L. & Kehoe, Timothy J., 1998. "A self-fulfilling debt crisis". Federal Reserve Bank of Minneapolis. Staff Report 211, July.
Cole, Harold L. & Kehoe, Timothy J., 2000. "Self-Fulfilling Debt Crises", Review of Economic Studies, Blackwell Publishing, vol. 67 (1), pp. 91-116, January.
Colmant, B., 2008. Présentation fiscale et économique du système Belge. Quelle fiscalité pour le capital à risque.
Cumby, R. and Evans, M., 1997. "The Term Structure of Credit Risk: Estimates and Specification Tests". Georgetown University, Washington, DC 20057.
Cumby, R. and Pastine, T. 2001. "Emerging market debt: Measuring credit quality and examining relative pricing". Journal of International Money and Finance. Vol. 20, pp. 591-609.
Detragiache, E., 1996. "Rational Liquidity Crises in the Sovereign Debt Market: In search of a theory", WP 96/38. IMF Working Paper.
Duffee, G., 1999. Estimating the Price of Default Risk. Federal Reserve Board. The Review of Financial Studies Spring, Vol. 12, No. 1, pp. 197-226.
Duffee, G., 2002. Term premia and interest rate forecasts in affine models. Journal of Finance 57, No.1 pp. 405-443.
Duffie, D. and Singleton, K., 1999. "Modeling Term Structures of Defaultable Bonds", The Review of Financial Studies, Vol. 12, Issue 4, pp. 687-720.
Duffie, D., Pedersen, L-H. and Singleton, K., 2003. Modeling sovereign yield spreads: A case study of Russian debt. Journal of Finance, Vol. LVIII, No 1, 119-159.
Manasse, P., Roubini, N. and Schimmelpfenning., 2003. Predicting sovereign debt crises. IMF Working paper.
Durbin, Erik and David Ng. 1999. "Uncovering Country Risk in Emerging Market Bond Prices". International Finance Discussion Paper 1999-639. Federal Reserve Board, Washington, D.C.
Eaton, Jonathan and Gersovitz, Mark. "Debt with Potential Repudiation: Theoretical and Empirical Analysis". Review of Economic Studies, April 1981, 48 (2), pp. 289-309.
Euromoney, Vol. 37, No 443, March 2006, Country risk poll.
Fons, J., 1987. The default premium and corporate bond experience. Journal of Finance, 42 (1), 81-97.
Giavazzi F., Pagano M. (1990), Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries, NBER Macroeconomics Annual 1990, National Bureau of Economic Research, Cambridge.
Hoti, S., 2005. Comparative analysis of risk ratings for the East European region. Mathematics and computers in simulation 68, issues 5-6, 449-462.
Hoti, S., McAleer, M., 2004. An empirical assessment of country risk ratings and associated models. J. Econ. Surveys 18, 4, 539-588.
Howell, L.D, 2001. The Handbook of Country and Political Risk Analysis (3rd ed.). The PRS Group, New York.
Jacquet, P., and Severino, J-M., 2004. Prêter, donner: Comment aider? Revue d'économie financière.
Jorgensen, E., and Sachs, J. 1989, "Default and Renegotiation of Latin American Foreign Bonds in the Interwar Period", NBER Working Paper No. 2636.
Kamin, Steven, and Karsten von Kleist. 1999. "The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s". International Finance Discussion Paper 1999-653. Federal Reserve Board, Washington, D.C.
Krishnamurthy, A., 2001. The Bond/Old Bond Spread. Northwestern University.
Krugman, 1979. "A model of balance-of-payments crises". Journal of Money Credit and Banking 11, pp. 311-325.
Manasse, P., and Roubini, N., 2005. Rules of thumb for sovereign debt crises. IMF Working Paper.
Mauro, Paolo, Nathan Sussman, and Yishay Yafeh. 2002. "Emerging Market Spreads: Then and now". Quarterly Journal of Economics 117 (2): 695-733.
Merrick, J., 2001. Crisis dynamics of implied default recovery ratios: Evidence from Russia and Argentina. Journal of Banking and Finance 25, 1921-1939.
Merrick, J., 2004. Evaluating pricing signals from the bond markets. Managing volatility and crisis, a practitioner's guide.
Neaime, S., 2004. Sustainability of budget deficits and public debt in Lebanon: A stationarity and co-integration analysis. Review of Middle East Economics and Finance, 43-61.
Obstfeld, Maurice, and Kenneth Rogoff, 1996, "Foundations of International Macroeconomics", MIT Press (Cambridge, Massachusetts).
Oosterlinck, K. and Szafarz, A., (2005), "Obligations souveraines: Situation du marché, évaluation du risque-pays et gestion des défauts", De Boeck & Larcier, Anne Knops, Brussels.
Reinhart, C., Rogoff, K. and Savastano, M., 2003. Debt intolerance. IMF, Brookings papers on economic activity.
Remolona, E., Scatigna, M. and Wu, E., 2007. Interpreting sovereign spreads. Bank of International Settlement, Quarterly Review.
Republic of Lebanon, Ministry of Finance. WWW.finance.gov.lb.
S&P viewpoint: Introduction of Sovereign Recovery Ratings, June 2007.
Saab, S., 2005. Is Lebanon's debt sustainable? A closer look at Lebanon's debt dynamics.
Sachs, J., External debt, structural adjustment and economic growth. International Monetary and Financial Issues for the 1990s, Vol. IX, 45-56.
Saleh, A-S., 2003. Public sector deficits and macroeconomic performance in Lebanon: A simulation analysis. Working paper 03-14.
Sims Ch. (2001), "Fiscal consequences for Mexico of adopting the dollar", Journal of Money, Credit and Banking, 33 (2), May, pp. 597-616.
Sy, Amadou. 2001."Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals". IMF Working Paper 01/165. International Monetary Fund, Washington, D.C.
Ureche-Rangau, L., 2003. Le marché est-il capable d'anticiper le défaut d'un Etat souverain? L'exemple de la Roumanie en 1933.
Weber, P-F., 2005. "(Re)structuration des dettes souveraines, ou en est-on?" Revue de la stabilité financière, No. 7, 115-135.
Westphalen, M., 2001. The determinants of sovereign bond credit spreads changes. Ecole des HEC, Université de Lausanne, and Fame.
Wu, C., 1991. A certainty equivalent approach to municipal bonds default risk estimation. The Journal of Financial Research Vol. 14, No 3, pp. 241-248.