The economic role of jumps and recovery rates in the market for corporate default risk

Paul Schneider, Leopold Sögner, Tanja Veža

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)1517-1547
Number of pages31
JournalJournal of Financial and Quantitative Analysis
Volume45
Issue number6
DOIs
StatePublished - Dec 2010

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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