Distressed Debt Prices And Recovery Rate Estimation

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Executive Summary

This paper has two purposes. First, it uses distressed debt prices to estimate recovery rates at default. In this regard, estimates are obtained for three recovery rate models: recovery of face value, recovery of Treasury, and recovery of market value. The authors show that identifying the "Economic" default date, as distinct from the recorded default date, is crucial to obtaining unbiased estimates. The economic default date is defined to be the first date when the market prices the firm's debt as if it has defaulted.

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