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Structural recovery of face value at default

Rajiv Guha, Alessandro Sbuelz and Andrea Tarelli

European Journal of Operational Research, 2020, vol. 283, issue 3, 1148-1171

Abstract: We carefully study the transmission mechanisms from default-free rates to corporate bond prices within structural models of endogenous default risk. The transmission critically depends on whether the model is value-based or cashflow-based, on the assumptions made for the drift of the state variable, and on the way the residual value at default is shared among bondholders. The recovery assumption is crucial: Recovery of Face Value, which entails receiving the same share of residual value at default regardless of the remaining maturity, greatly helps explaining the empirical evidence on bond-price sensitivities to interest rates.

Keywords: Finance; Bond risk management; Duration; Structural endogenous default risk; Recovery forms (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:283:y:2020:i:3:p:1148-1171

DOI: 10.1016/j.ejor.2019.11.057

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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