Implementation and Results
The discussion in Chapter 4 revealed that an uncontaminated measure of implied recovery, as put forth by Eq. (3.8), can be derived either i) from two CDSs referencing bonds of different priorities or ii) from a U.S. LCDS and a CDS, provided that divergent restructuring definitions are accounted for. In Section 5.1, the universe of available (L)CDS data is screened, and firms are identified on which either pair is outstanding at a given point in time. This allows it to construct suitable sets of historical premia for the implementation of the approach. Further, issuers’ capital structure is analyzed such that the priority of claims can be accounted for.
KeywordsRecovery Rate Risk Aversion Capital Structure Credit Default Swap Default Risk
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