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The Determinants of Market-Implied Recovery Rates

Department of Finance, HEC Montréal, 3000 Chemin de la Côte-Ste-Catherine, Montreal, QC H3T 2A7, Canada
Risks 2019, 7(2), 57; https://doi.org/10.3390/risks7020057
Received: 1 April 2019 / Revised: 6 May 2019 / Accepted: 10 May 2019 / Published: 18 May 2019
(This article belongs to the Special Issue Advances in Credit Risk Modeling and Management)
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. View Full-Text
Keywords: recovery rate; credit risk; loss given default recovery rate; credit risk; loss given default
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François, P. The Determinants of Market-Implied Recovery Rates. Risks 2019, 7, 57.

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