Modeling the Recovery Rate in a Reduced Form Model
University of California, Berkeley
Robert A. Jarrow
Cornell University - Samuel Curtis Johnson Graduate School of Management
affiliation not provided to SSRN
Mathematical Finance, Vol. 19, Issue 1, pp. 73-97, January 2009
This paper provides a model for the recovery rate process in a reduced form model. After default, a firm continues to operate, and the recovery rate is determined by the value of the firm's assets relative to its liabilities. The debt recovers a different magnitude depending upon whether or not the firm enters insolvency and bankruptcy. Although this recovery rate process is similar to that used in a structural model, the reduced form approach is maintained by utilizing information reduction in the sense of Guo, Jarrow, and Zeng. Our model is able to provide analytic expressions for a firm's default intensity, bankruptcy intensity, and zero-coupon bond prices both before and after default.
Number of Pages in PDF File: 25
Date posted: January 17, 2009
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