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The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

Schneider, Paul and Sögner, Leopold and Veza, Tanja (2010) The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk. Journal of Financial and Quantitative Analysis, 45 (6). pp. 1517-1547. ISSN 0022-1090

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Abstract

Using an extensive cross-section of US corporate CDS this paper offers an economic understanding of implied loss given default (LGD) and jumps in default risk. We formulate and underpin empirical stylized facts about CDS spreads, which are then reproduced in our affine intensity-based jump-diffusion model. Implied LGD is well identified, with obligors possessing substantial tangible assets expected to recover more. Sudden increases in the default risk of investment-grade obligors are higher relative to speculative grade. The probability of structural migration to default is low for investment-grade and heavily regulated obligors because investors fear distress rather through rare but devastating events. (authors' abstract)

Item Type: Article
Additional Information: To see the final version of this paper please visit the publisher's website. Access to the published version may require a subscription.
Keywords: credit default swaps / loss given default / stochastic intensity / jump-difusion / Markov chain Monte Carlo estimation
Divisions: Departments > Finance, Accounting and Statistics > Finance, Banking and Insurance
Version of the Document: Accepted for Publication
Variance from Published Version: Minor
Depositing User: Dissertation Administrator
Date Deposited: 28 Mar 2011 13:38
Last Modified: 12 Jul 2015 13:10
Related URLs:
URI: http://epub.wu.ac.at/id/eprint/3027

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