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8

This is a loaded question. Ross' recovery theorem has both flaws and insights. The single answer thus far did a great job of addressing the flaws from an economics perspective. No one questions that the math is wrong: it is correct. Here is a mathematical insight from Ross' work. Abstracting from the finance and economics, the purely probabilistic content of ...


8

Very simply, Ross' framework assumes a great deal to extract the true pricing kernel. Time homogeneity, additively separable state dependent utility, (discrete time Markovian structure - though these have been relaxed.) In particular, there are two schools of criticism, one is that time homogeneity makes little sense in the real market. In fact, the Recovery ...


5

This is indeed a markit vocabulary that spread worldwide. Both recoveries are indeed "often" equal, but there is nevertheless a huge difference between them : one is a pure quotation tool whereas the other is an average or selected market "prices" : the assumed recovery rate is only used for a quotation purpose : to do the (quoted spread,coupon) --> upfront ...


3

If the contract is actually triggered, then it will pay out depending on the actual recovery rate of the particulars of the circumstance. To recap: nominal CDS recovery rate in ISDA docs - used as a convention in the pricing of CDS contracts (spread vs upfront etc). Has nothing to do with any particular credit event. expected recovery rate - modeled ...


2

Suppose the number in the first column is x, then the y value in the second column should be calculated as; y = x / (1 - x) Hope this helps


2

Recovery rates are rarely "modeled" per se, in the sense that most practitioners avoid treating them as random variables. I doubt you want to buck that trend here. As jeff m implies in the comments, it's the cash flow that you really want to know about, so you'll find it more useful to think in terms of the mechanism behind recovery. If the issuer ...


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