Is recovery risk priced?

Recovery risk to explain corporate debt premia has not received much attention so far, most likely due to the difficulties around decomposing the expected loss. We exploit the fact that differently-ranking debt instruments of the same issuer face identical default risk but different default-conditional recovery rates. This allows us to isolate implied recovery under the T-forward measure without any of the rigid assumptions employed by prior studies. We find a pronounced systematic component in recovery rates for which investors should receive a premium. Comparisons to physical realizations show that the premium is quite time-stable and similar for different debt seniorities.