The Expected Recovery Rate and the Probability of Default on High Yield Debt
21 Pages Posted: 28 Jun 2007 Last revised: 17 Dec 2008
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules
-
The Link between Default and Recovery Rates
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
The Link between Default and Recovery Rates: Theory, Empirical Evidence and Implications
By Edward I. Altman, Brooks Brady, ...
-
Understanding Aggregate Default Rates of High Yield Bonds
By Jean Helwege and Paul Kleiman