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

Paul Schneider, Leopold Sögner, Tanja Veza

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in Fachzeitschrift

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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)
OriginalspracheEnglisch
Seiten (von - bis)1517-1547
FachzeitschriftJournal of Financial and Quantitative Analysis
Jahrgang45
Ausgabenummer6
DOIs
PublikationsstatusVeröffentlicht - 2010

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