Abstract
The U.S. high-yield bond market has grown dramatically in the past three decades, reaching more than $1 trillion in outstanding debt as of mid-year 2006. But little rigorous analysis has been done on what happens to the recovery rate over the credit cycle. Most models assume a fixed recovery rate, but a recent model that was tested using more than 1,000 defaulted bonds shows an inverse relationship between the probability of default and the recovery rate. Based on this model, several industries may be quite vulnerable to a high risk of default in the current environment.
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