PT - JOURNAL ARTICLE AU - Gordon Delianedis AU - Ronald Lagnado TI - Recovery Assumptions in the Valuation of Credit Derivatives AID - 10.3905/jfi.2002.319309 DP - 2002 Mar 31 TA - The Journal of Fixed Income PG - 20--30 VI - 11 IP - 4 4099 - https://pm-research.com/content/11/4/20.short 4100 - https://pm-research.com/content/11/4/20.full AB - Recovery affects the amount a debtholder receives if a bond issuer defaults. This article examines the impact of recovery rate modeling on risk-neutral default probabilities and the pricing of credit default swaps using a reduced-form model. A multiperiod reduced-form model using different assumptions as to recovery of treasury, of market value, and of face value leads to different expressions for the term structure of risk-neutral default probabilities and the price of credit default swaps. There are small differences for investment-grade and short-maturity default swaps. As the credit quality of an issuer deteriorates, the differences in the risk-neutral default probabilities and default swap prices become more pronounced for the three recovery rate models.