Structural Recovery of Face Value at Default

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

A Recovery of Face Value at Default (RFV) means receiving the same fractional recovery of par at default for bonds of the same issuer and seniority, regardless of remaining maturity. We find that RFV in a parsimonious structural credit risk model has a profound impact on hedging interest rate risk as it strongly affects model sensitivities to interest rates. In particular, RFV explains and quantifies two important stylized facts: i) the low empirical duration of high-yield bonds and ii) the decreasing sensitivity of credit spreads to interest rates as credit quality declines. The recovery form used in empirical studies influences their interpretation as the default-free term structure (level and slope) interacts with the recovery form in determining model credit spreads.
Original languageEnglish
Title of host publicationEuropean Finance Association 2003 Glasgow Meetings Presentation Papers (SSRN Archive)
PagesEFA 2003 Annual Conference Paper No. 839
Publication statusPublished - 2003
EventEuropean Finance Association 2003 Meetings - Glasgow (Scotland, UK)
Duration: 20 Aug 200323 Aug 2003

Conference

ConferenceEuropean Finance Association 2003 Meetings
CityGlasgow (Scotland, UK)
Period20/8/0323/8/03

Keywords

  • ecovery Forms, Structural Credit Risk Models, Duration

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