The thermoplastic elastomer (TPE) prepared by dynamic vulcanization is a two-phase material in which crosslinked rubber particles are densely dispersed in a ductile polymer matrix. The TPE shows an excellent strain recovery, even though the matrix consists of ductile plastics. This behavior was exemplified in a 50/50 poly(butylene terephthalate)(PBT)/ethylene rubber blend. Finite element method (FEM) analysis revealed that: (1) the low stress evolved in PET matrix with bulk deformation, especially in the ligament matrix between rubber particles in stretching direction, is locally preserved within an elastic limit and it acts as an in situ formed adhesive for interconnecting the rubber panicles, and (2) the volumeric strain of rubber particles with high Poisson＇s ratio provides the contractile stress to heal the plastically deformed PET phase outside the ligament matrix. Such strain mechanisms were supported by the polarized FT-Raman spectroscopy in terms of the peak shift caused by chain distortion, its anisotropy, and the gauche-to-trans transformation associated with plastic deformationm, in comparison with those in neat PBT.