Structural Recovery of Face Value at Default

30 Pages Posted: 14 Dec 2005 Last revised: 8 Feb 2019

See all articles by Rajiv Guha

Rajiv Guha

Alpamayo Capital Management Limited

Alessandro Sbuelz

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Andrea Tarelli

Catholic University of Milan

Date Written: October 2018

Abstract

We carefully study the transmission mechanisms from default-free rates to corporate bond prices within structural models of endogenous default risk. The transmission critically depends on whether the model is value-based or EBIT-based, on the assumptions made for the drift of the state variable, and on the way the residual value at default is shared among bondholders. The recovery assumption is crucial: Recovery of Face Value, which entails receiving the same share of residual value at default regardless of the remaining maturity, greatly helps explaining the empirical evidence on bond-price sensitivities to interest rates.

Keywords: Bond risk management, Duration, Structural endogenous default risk, Recovery forms

JEL Classification: G12, G13, G33

Suggested Citation

Guha, Rajiv S. and Sbuelz, Alessandro and Tarelli, Andrea, Structural Recovery of Face Value at Default (October 2018). Available at SSRN: https://ssrn.com/abstract=869366 or http://dx.doi.org/10.2139/ssrn.869366

Rajiv S. Guha

Alpamayo Capital Management Limited ( email )

1 Coldbath Square
London
United Kingdom

Alessandro Sbuelz (Contact Author)

Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics ( email )

largo A. Gemelli 1
I-20123 Milan
Italy
+39 02 7234 2345 (Phone)
+39 02 7234 2671 (Fax)

HOME PAGE: http://ppd.unicatt.it/docenti/alessandro_sbuelz

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Andrea Tarelli

Catholic University of Milan ( email )

Largo Gemelli, 1
Milan, 20123
Italy

HOME PAGE: http://sites.google.com/view/andreatarelli

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