The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

60 Pages Posted: 19 Mar 2008 Last revised: 21 May 2009

See all articles by Paul Schneider

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Leopold Sögner

Institute for Advanced Studies (IHS); Vienna Graduate School of Finance (VGSF)

Tanja Veza

WU Vienna (Vienna University of Economics and Business)

Date Written: May 14, 2009

Abstract

Using an extensive cross-section of US corporate CDS 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.

Keywords: credit default swaps, credit risk, loss given default, stochastic intensity, jump-diffusion, Markov chain Monte Carlo estimation

JEL Classification: C11, C15, C51, C52, E43, G13

Suggested Citation

Schneider, Paul Georg and Sögner, Leopold and Veza, Tanja, The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk (May 14, 2009). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=961341

Paul Georg Schneider (Contact Author)

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Leopold Sögner

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Tanja Veza

WU Vienna (Vienna University of Economics and Business) ( email )

Institute for Banking and Finance
Heiligenstaedter Strasse 46-48
Vienna, 1190
Austria

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