The Expected Recovery Rate and the Probability of Default on High Yield Debt

21 Pages Posted: 28 Jun 2007 Last revised: 17 Dec 2008

See all articles by John J. Binder

John J. Binder

University of Illinois at Chicago - Department of Finance

Date Written: January 2008

Abstract

Several studies find a negative relation between the recovery rate and the default rate on high yield debt. It has been argued that this is due to inelastic demand for defaulted debt. This paper shows, based on definitional relations in the bond market, that the expected recovery rate is positively related (everything else equal) to the ex ante probability of default. Empirical evidence supports the model and indicates that it is useful in explaining the default rate as well as the recovery rate.

Keywords: high yield debt, recovery rates, default rates

JEL Classification: G10

Suggested Citation

Binder, John J., The Expected Recovery Rate and the Probability of Default on High Yield Debt (January 2008). Available at SSRN: https://ssrn.com/abstract=997180 or http://dx.doi.org/10.2139/ssrn.997180

John J. Binder (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

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