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An Empirical Analysis of Bond Recovery Rates: Exploring A Structural View of Default

by Dan Covitz of the Federal Reserve Board, and
Song Han of the Federal Reserve Board

December 2004

Abstract: Using a new and comprehensive data set, this paper analyzes recovery rates of defaulted bonds, measured by market price of the bonds at the time of default. We use a structural view of default to argue that the variations in recovery rates are caused by delays between insolvency and default and by jumps in firm value that propel a firm into default. We find evidence consistent with these hypotheses and also uncover new evidence of macroeconomic determinants of bond recovery rates. In addition, we find that the empirical relationship between recovery rates and macroeconomic conditions may be nonlinear. The relationship, in general, is positive, but tapers off and becomes negative during very "good" times.

JEL Classification: G33, G34, G12.

Keywords: Recovery rate, default, credit risk model.

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