Why Defaulted Bond Yields and Stale Prices Mislead Analysis

Summary

The document explains why reported yields on defaulted Greek government bonds can become meaningless. Yield is calculated from promised future cash flows, but after default those payments are no longer assured; the instrument is better understood through its traded price and possible restructuring outcomes. An analyst evaluating the bonds should model plausible changes to maturity or principal and calculate scenario-specific yields only when those assumptions are explicit.

The response also flags months of unchanged quoted prices as a separate data-quality problem. It offers no empirical validation of the Greek yield series or method for cleaning it, so it does not establish whether the data can be used unchanged. Researchers should investigate the underlying pricing and default treatment before using these observations in asset-price analysis.

Key ideas

• A bond yield depends on expected or promised cash flows, which may cease to describe a defaulted bond.
• Defaulted debt should generally be analyzed using its traded price and explicit restructuring scenarios.
• A yield calculated from pre-default payment terms can misrepresent the instrument after default.
• Repeated stale prices can create a separate data-quality problem in historical series.

Tags

# Stale prices: Greek government bond yields


# Stale prices: Greek government bond yields












I am analysing the effects of some Central Bank's policies on asset prices. Among others, daily 5y and 10y Greek government bond yields are part of my dataset. Data are fromm Datastream.

I know that Greece was hit by the sovereign debt crisis from 2011, and that this led to haircuts on debt owed to private investors in 2011, but what is the exact reason for the stale prices that occured for both assets from the end of 2011 untile the first months of 2012? Do you think that I can use these time series as they are? How would you address the issue? Thank you.

## Answer by Dimitri Vulis (score 2)

https://quant.stackexchange.com/a/57964

A yield of a defaulted bond is just nonsense.

A yield is the internal rate of return of some cash flows promised in the future.

A defaulted bond trades on price and does not promise any cash flows. Quoting some nonsensical yield based on the cash flows that were promised before the default is very misleading. It is extremely unusual to be paid eventually exactly the same cash flows. It may be useful analysis to consider possible restructing scenarios (such as extending maturity or reducing notional) and calculating the yields under these scenarios, but what Datastream does is appalling.

Also quoting the same stale price for months is bad practice.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.