Author : Dirk Herkommer
Publisher :
ISBN 13 :
Total Pages : 31 pages
Book Rating : 4.:/5 (129 download)
Book Synopsis Recovery Rates in Credit Default Models Theory and Application to Corporate Bonds by : Dirk Herkommer
Download or read book Recovery Rates in Credit Default Models Theory and Application to Corporate Bonds written by Dirk Herkommer and published by . This book was released on 2008 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper I derive a reduced form credit risk model with stochastic recovery rates that is able to distinguish between default and bankruptcy and that is able to price defaulted debt consistently. First, I develop a general corporate bond pricing formula with the help of Characteristic Functions. Second, I specify the driving state variables as well as the functional form of intensities and recovery rates to derive a closed form valuation formula. In a numerical example I show how the resulting credit spreads depend on the default and bankruptcy parameters and the assumption of stochastic intensities and recovery rates. Credit spreads increase with higher default and bankruptcy intensities and decrease with higher recovery rates at default and at bankruptcy. If intensities and recovery rates are constant, the resulting term structure differs significantly. Additionally modeling the recovery rates stochastically has smaller effects.