Life after Default: Dealer Intermediation and Recovery in Defaulted Corporate Bonds

Friedrich Baumann, Ali Kakhbod, Dmitry Livdan, Abdolreza Nazemi and Norman Schürhoff
Additional contact information
Friedrich Baumann: Karlsruhe Institute of Technology
Ali Kakhbod: University of California, Berkeley
Abdolreza Nazemi: Karlsruhe Institute of Technology
Norman Schürhoff: University of Lausanne, Swiss Finance Institute and CEPR
Authors registered in the RePEc Author Service: Norman Schuerhoff

No 23-85, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We examine the trading and pricing of defaulted U.S. corporate bonds. Defaulted bonds are actively traded since the bonds’ natural holders change from buy-and-hold to specialized vulture investors. We document that intermediation after default shifts to dealers with prior expertise in the defaulted bond. These primary dealers locate higher-valuation counterparties in longer intermediation chains and absorb more order flow in their inventory than other dealers. The switch to trading with primary dealers raises recovery rates by 8%. Our results highlight the importance of dealers’ expertise in intermediating specific corporate bonds which stabilizes market functioning and lowers credit risk ex-ante.

Keywords: corporate default; corporate bonds; recovery rates; over-the-counter markets; dealer networks (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2023-09
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Life after Default: Dealer Intermediation and Recovery in Defaulted Corporate Bonds (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2385

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