Reassessing recovery rates – floating recoveries

Chris Kenyon () and Ralf Werner ()
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Chris Kenyon: Credit Suisse AG
Ralf Werner: Hochschule München, Fakultät für Informatik und Mathematik

A chapter in Operations Research Proceedings 2011, 2012, pp 185-190 from Springer

Abstract: Abstract An important but rather neglected input to the pricing of credit derivatives is the recovery rate. It is a priori not clear how an (expected) recovery rate should be chosen for standard credit derivatives pricing models. The problem is especially acute when quoted prices contradict previous recovery rate assumptions. Therefore, in this paper we consider a dynamic calibration of traditional static CDS models. We start from the usual recalibration and propose heuristics for a market-consistent calibration of the recovery rate. Thus the market-implied recovery rate that is now an output can be used as an input for stochastic recovery rate models.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:spr:oprchp:978-3-642-29210-1_30

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DOI: 10.1007/978-3-642-29210-1_30

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