Market Expectations of Recovery Rates
42 Pages Posted: 10 Jan 2014
Date Written: December 11, 2013
We develop a new methodology to extract market expectations of recovery rates that uses information from credit default swap spreads on debt instruments of different seniorities, incorporates information on the firm-specific liability structure and allows for deviations from the absolute priority rule. In our empirical analysis, we find that expected recovery rates exhibit a large cross-sectional and time-series variation and that recovery rates of financial institutions are on average larger than those of non-financial companies. Using a panel regression, we show that anticipated government support increases the market expectations of recovery rates of financial companies and therefore helps to explain these differences.
Keywords: Recovery Rate, Credit Default Swap, Crisis
JEL Classification: G10, G18, G21, G28
Suggested Citation: Suggested Citation