Schneider, Paul, Sögner, Leopold and Veža, Tanja. (2010) The economic role of jumps and recovery rates in the market for corporate default risk. Journal of Financial and Quantitative Analysis, Vol.45 (No.6). pp. 1517-1547. ISSN 0022-1090

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Abstract

Using an extensive cross section of U.S. corporate credit default swaps (CDSs), 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.

Item Type:	Journal Article
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Journal of Financial and Quantitative Analysis
Publisher:	Cambridge University Press
ISSN:	0022-1090
Date:	December 2010
Volume:	Vol.45
Number:	No.6
Page Range:	pp. 1517-1547
Identification Number:	10.1017/S0022109010000554
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/42022

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