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An empirical analysis of alternative recovery risk models and implied recovery rates

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Abstract

This article studies the role of recovery on defaultable debt prices in alternative recovery risk models. The empirical results suggest two central findings. First, the recovery concept that specifies recovery as a fraction of the discounted par value has broader empirical support. Second, parametric debt valuation models can provide a useful assessment of recovery rates embedded in bond prices.

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Authors and Affiliations

  1. Morgan Stanley, 750 Seventh Avenue, New York, NY, 110019, USA

    Frank Xiaoling Zhang

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  1. Frank Xiaoling Zhang
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Correspondence to Frank Xiaoling Zhang.

Additional information

The author thanks an associate editor and an anonymous referee for helpful comments. I also thank Mark Carey, Ren-Raw Chen, Darrell Duffie, Greg Duffee, Jean Helwege, Jingzhi (Jay) Huang, Bob Jarrow, Paul Kupiec, Richard McLean, Matt Pritsker, Ken Singleton, Haluk Unal, and Liuren Wu. Seminar participants at the 2004 American Finance Association meetings, 8th annual Chinese finance association meetings (New York University), FDIC, Federal Reserve Board, University of New Orleans, and Rutgers University provided several useful suggestions. The bulk of this paper was finished when I was at the Federal Reserve Board.

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Zhang, F.X. An empirical analysis of alternative recovery risk models and implied recovery rates. Rev Deriv Res 13, 101–124 (2010). https://doi.org/10.1007/s11147-009-9046-1

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  • DOI: https://doi.org/10.1007/s11147-009-9046-1

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