The Determinants of Recovery Rates in the US Corporate Bond Market
Rainer Jankowitsch, Vienna University of Economics and Business
Florian Nagler, Vienna University of Economics and Business
Marti G. Subrahmanyam, New York University

The authors examine recovery rates of defaulted bonds in the US corporate bond market, based on a complete set of traded prices and volumes. A study of the trading microstructure around various types of default events is provided. They document temporary price pressure with high trading volumes on the default day and the following 30 days, and low trading activity thereafter. Based on this analysis, they determine market-based recovery rates and quantify various liquidity measures. They also study the relation between the recovery rates and these measures, considering additionally a comprehensive set of bond characteristics, firm fundamentals, and macroeconomic variables.

In the event of bankruptcy, bond values depend critically on ultimate recovery rates. The determinants of these rates therefore should be of particular interest to investment managers and sponsors who hold defaulted bonds, or bonds for which the probability of default is significant.