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.
Lingua originaleEnglish
Titolo della pubblicazione ospiteEuropean Finance Association 2003 Glasgow Meetings Presentation Papers (SSRN Archive)
PagineEFA 2003 Annual Conference Paper No. 839
Stato di pubblicazionePubblicato - 2003
EventoEuropean Finance Association 2003 Meetings - Glasgow (Scotland, UK)
Durata: 20 ago 200323 ago 2003

Convegno

ConvegnoEuropean Finance Association 2003 Meetings
CittàGlasgow (Scotland, UK)
Periodo20/8/0323/8/03

Keywords

  • ecovery Forms, Structural Credit Risk Models, Duration

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