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Market Expectations of Recovery Rates

42 Pages Posted: 10 Jan 2014  

Sorana Sarbu

Karlsruhe Institute of Technology (KIT) - Financial Engineering and Derivatives Department

Claus Schmitt

Rotterdam School of Management

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Date Written: December 11, 2013

Abstract

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

Sarbu, Sorana and Schmitt, Claus and Uhrig-Homburg, Marliese, Market Expectations of Recovery Rates (December 11, 2013). Available at SSRN: https://ssrn.com/abstract=2376354 or http://dx.doi.org/10.2139/ssrn.2376354

Sorana Sarbu

Karlsruhe Institute of Technology (KIT) - Financial Engineering and Derivatives Department ( email )

Kaiserstra├če 12
Karlsruhe, Baden W├╝rttemberg 76131
Germany

HOME PAGE: HOME PAGE: http://derivate.fbv.kit.edu

Claus Schmitt (Contact Author)

Rotterdam School of Management ( email )

United States

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

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