Restructuring risk in credit default swaps: An empirical analysis

Antje Berndt, Robert Jarrow () and ChoongOh Kang

Stochastic Processes and their Applications, 2007, vol. 117, issue 11, 1724-1749

Abstract: This paper estimates the price for restructuring risk in the US corporate bond market during 1999-2005. Comparing quotes from default swap (CDS) contracts with a restructuring event and without, we find that the average premium for restructuring risk represents 6%-8% of the swap rate without restructuring. We show that the restructuring premium depends on firm-specific balance-sheet and macroeconomic variables. And, when default swap rates without a restructuring event increase, the increase in restructuring premia is higher for low-credit-quality firms than for high-credit-quality firms. We propose a reduced-form arbitrage-free model for pricing default swaps that explicitly incorporates the distinction between restructuring and default events. A case study illustrating the model's implementation is provided.

Keywords: Credit; default; swaps; Restructuring; credit; event; Reduced-form; credit; risk; modeling (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (12)

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Working Paper: Restructuring Risk in Credit Default Swaps: An Empirical Analysis (2006)
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