constant recovery rate in CDS pricing

finalguy · November 26th, 2007, 4:02 am

I am recently reading some research papers about CDS pricing. All these papers treat the recovery rate, R, as a constant, which surprised me a lot.In my opinion, we cannot predict the recovery rate when we sign the contract. So how could the recovery rate be a constant?

Svetliy · November 26th, 2007, 8:17 am

It is just a simplification assumption in some intensity-based models, i suppose. There is a number of structural models were recovery rate in not constant. See Hull, White and P..(forgot the surname) 2005, for example.

Lapin · November 26th, 2007, 9:45 am

it is also a market convention to take the recovery rate = 40% (in most of the cases - but not all)