A Recovery of Face Value at Default (RFV) means receiving the same fractional recovery of par at default for bonds of the same issuer and seniority, regardless of remaining maturity. We find that RFV in a parsimonious structural credit risk model has a profound impact on hedging interest rate risk as it strongly affects model sensitivities to interest rates. In particular, RFV explains and quantifies two important stylized facts: i) the low empirical duration of high-yield bonds and ii) the decreasing sensitivity of credit spreads to interest rates as credit quality declines. The recovery form used in empirical studies influences their interpretation as the default-free term structure (level and slope) interacts with the recovery form in determining model credit spreads.
Guha, R., Sbuelz, A., Structural Recovery of Face Value at Default, Selected paper, in European Finance Association 2003 Glasgow Meetings Presentation Papers (SSRN Archive), (Glasgow (Scotland, UK), 20-23 August 2003), Social Science Research Network: EFA 2003 Glasgow Meetings Presentation Papers (Archive), Glasgow 2003: EFA 2003 Annual Conference Paper No. 839-EFA 2003 Annual Conference Paper No. 839 [http://hdl.handle.net/10807/23779]
Structural Recovery of Face Value at Default
Sbuelz, Alessandro
2003
Abstract
A Recovery of Face Value at Default (RFV) means receiving the same fractional recovery of par at default for bonds of the same issuer and seniority, regardless of remaining maturity. We find that RFV in a parsimonious structural credit risk model has a profound impact on hedging interest rate risk as it strongly affects model sensitivities to interest rates. In particular, RFV explains and quantifies two important stylized facts: i) the low empirical duration of high-yield bonds and ii) the decreasing sensitivity of credit spreads to interest rates as credit quality declines. The recovery form used in empirical studies influences their interpretation as the default-free term structure (level and slope) interacts with the recovery form in determining model credit spreads.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.