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A Simple Approach to Estimate Recovery Rates with APR Violation from Debt Spreads

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  • Haluk Unal
  • Dilip Madan
  • Levent Guntay
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    Abstract

    This paper proposes a simple approach to estimate the implied recovery rates embedded in the prices of the debt securities of a firm that differ in priority at time of default. The approach allows for a complex capital structure setting assuming that the absolute priority rule (APR) can be violated. The paper demonstrates that a new statistic, the adjusted relative spread, captures recovery information in debt prices. Model implied recovery rates from corporate bond prices are observed to be consistent with the findings of Altman and Kishore (1996). Interest rates and firm tangible assets are shown to be significant determinants of recovery rates.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/01/0107.pdf
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    Bibliographic Info

    Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 01-07.

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    Date of creation: Feb 2001
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    Handle: RePEc:wop:pennin:01-07

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    Cited by:
    1. Pesaran, M.H. & Schuermann, T. & Treutler, B-J. & Weiner, S.M., 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Cambridge Working Papers in Economics 0330, Faculty of Economics, University of Cambridge.
    2. Greta Falavigna, 2006. "Models for Default Risk Analysis: Focus on Artificial Neural Networks, Model Comparisons, Hybrid Frameworks," CERIS Working Paper 200610, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
    3. Wilson Sy, 2007. "A Causal Framework for Credit Default Theory," Research Paper Series 204, Quantitative Finance Research Centre, University of Technology, Sydney.

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