Time-Dependent Recovery Rates of Defaulted Debt

EEVENT RISK, Marco Avellaneda, ed., Risk Books, Forthcoming

Posted: 2 Nov 2005

See all articles by Peter Chang

Peter Chang

Standard & Poor's - Quantitative Analytics

Craig A. Friedman

State++

Kevin Kelhoffer

Standard & Poor's - Quantitative Analytics

Sven Sandow

Standard & Poor's - Quantitative Analytics

Abstract

We model the conditional probability distribution of trading prices of defaulted large-US-corporate debt given the time since default, the position of the debt on the balance sheet, collateral quality, and economy and industry-wide default rates. The model is based on a maximum expected utility approach. We find that the expected recovery tends to increase (decrease) with the time since default when default occurs in an adverse (good) economic environment. In a middle-of-the-range economic environment, the expected recovery tends to increase with time for a bad (relatively inferior on balance sheet and bad collateral) debt instrument and changes very little with time for a good (relatively superior on balance sheet and good collateral) debt instrument. The conditional variance of the recovery increases with time for a bad debt instrument and is fairly stable to slightly increasing with time for a good debt instrument.

Suggested Citation

Chang, Peter and Friedman, Craig A. and Kelhoffer, Kevin and Sandow, Sven, Time-Dependent Recovery Rates of Defaulted Debt. EEVENT RISK, Marco Avellaneda, ed., Risk Books, Forthcoming, Available at SSRN: https://ssrn.com/abstract=829704

Peter Chang (Contact Author)

Standard & Poor's - Quantitative Analytics ( email )

55 Water Street
New York, NY 10041
United States

Craig A. Friedman

State++ ( email )

New York, NY
United States

Kevin Kelhoffer

Standard & Poor's - Quantitative Analytics ( email )

55 Water Street
New York, NY 10041
United States

Sven Sandow

Standard & Poor's - Quantitative Analytics ( email )

55 Water Street
New York, NY 10041
United States

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