The Determinants of Market-Implied Recovery Rates
In the presence of recovery risk, the recovery rate is a random variable whose risk-neutral expectation can be inferred from the prices of defaultable instruments. I extract market-implied recovery rates from the term structures of credit default swap spreads for a sample of 497 United States (U.S.)...
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| Format: | Article |
| Language: | English |
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MDPI AG
2019-05-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/7/2/57 |
| _version_ | 1811337271864983552 |
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| author | Pascal François |
| author_facet | Pascal François |
| author_sort | Pascal François |
| collection | DOAJ |
| description | In the presence of recovery risk, the recovery rate is a random variable whose risk-neutral expectation can be inferred from the prices of defaultable instruments. I extract market-implied recovery rates from the term structures of credit default swap spreads for a sample of 497 United States (U.S.) corporate issuers over the 2005−2014 period. I analyze the explanatory factors of market-implied recovery rates within a linear regression framework and also within a Tobit model, and I compare them with the determinants of historical recovery rates that were previously identified in the literature. In contrast to their historical counterparts, market-implied recovery rates are mostly driven by macroeconomic factors and long-term, issuer-specific variables. Short-term financial variables and industry conditions significantly impact the slope of market-implied recovery rates. These results indicate that the design of a recovery risk model should be based on specific market factors, not on the statistical evidence that is provided by historical recovery rates. |
| first_indexed | 2024-04-13T17:52:22Z |
| format | Article |
| id | doaj.art-63d754ca44224bf1a032fa9ee6b60011 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-04-13T17:52:22Z |
| publishDate | 2019-05-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-63d754ca44224bf1a032fa9ee6b600112022-12-22T02:36:38ZengMDPI AGRisks2227-90912019-05-01725710.3390/risks7020057risks7020057The Determinants of Market-Implied Recovery RatesPascal François0Department of Finance, HEC Montréal, 3000 Chemin de la Côte-Ste-Catherine, Montreal, QC H3T 2A7, CanadaIn the presence of recovery risk, the recovery rate is a random variable whose risk-neutral expectation can be inferred from the prices of defaultable instruments. I extract market-implied recovery rates from the term structures of credit default swap spreads for a sample of 497 United States (U.S.) corporate issuers over the 2005−2014 period. I analyze the explanatory factors of market-implied recovery rates within a linear regression framework and also within a Tobit model, and I compare them with the determinants of historical recovery rates that were previously identified in the literature. In contrast to their historical counterparts, market-implied recovery rates are mostly driven by macroeconomic factors and long-term, issuer-specific variables. Short-term financial variables and industry conditions significantly impact the slope of market-implied recovery rates. These results indicate that the design of a recovery risk model should be based on specific market factors, not on the statistical evidence that is provided by historical recovery rates.https://www.mdpi.com/2227-9091/7/2/57recovery ratecredit riskloss given default |
| spellingShingle | Pascal François The Determinants of Market-Implied Recovery Rates Risks recovery rate credit risk loss given default |
| title | The Determinants of Market-Implied Recovery Rates |
| title_full | The Determinants of Market-Implied Recovery Rates |
| title_fullStr | The Determinants of Market-Implied Recovery Rates |
| title_full_unstemmed | The Determinants of Market-Implied Recovery Rates |
| title_short | The Determinants of Market-Implied Recovery Rates |
| title_sort | determinants of market implied recovery rates |
| topic | recovery rate credit risk loss given default |
| url | https://www.mdpi.com/2227-9091/7/2/57 |
| work_keys_str_mv | AT pascalfrancois thedeterminantsofmarketimpliedrecoveryrates AT pascalfrancois determinantsofmarketimpliedrecoveryrates |