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.
|Numero di pagine||24|
|Rivista||European Journal of Operational Research|
|Stato di pubblicazione||Pubblicato - 2019|
- Bond risk management
- Recovery forms
- Structural endogenous default risk