RECOVERY VALUES ON sovereign emerging market debt have not been subject to extensive research, largely owing to the changing nature of sovereign debt crises. Since bond prices depend on the expected recovery value, it is possible to derive recovery values implied by market prices, especially during a crisis.
Spreads on credit default swap contracts can be used to estimate the implied default probabilities using the cheapest-to-deliver (CTD) bond as a proxy for a stochastic recovery value.
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