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The Resiliency of the High-Yield Bond Market: The LTV Default

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  • Ma, Christopher K
  • Rao, Ramesh P
  • Peterson, Richard L

Abstract

This paper investigates the resiliency of the new-issue high-yield bond market by examining the changes in implied default rates of such bonds before and after the largest high-yield bond default, i.e., the LTV bankruptcy. Specifically, the paper compares implied default probabilities of high-yield bonds during the post-LTB period calculated from actual new-issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred. A comparison of these probabilities reveals that the market's perception of default on the high-risk segment of the bond market increased significantly after the LTV bankruptcy. However, the effect was transitory, lasting only six months. Thus, the market was resilient to a major default. Copyright 1989 by American Finance Association.

Suggested Citation

  • Ma, Christopher K & Rao, Ramesh P & Peterson, Richard L, 1989. " The Resiliency of the High-Yield Bond Market: The LTV Default," Journal of Finance, American Finance Association, vol. 44(4), pages 1085-1097, September.
  • Handle: RePEc:bla:jfinan:v:44:y:1989:i:4:p:1085-97
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    Cited by:

    1. de Bondt, Gabe & Marqués-Ibáñez, David, 2004. "The high-yield segment of the corporate bond market: a diffusion modelling approach for the United States, the United Kingdom and the euro area," Working Paper Series 313, European Central Bank.
    2. Patrick Artus & Philippe Ducos & Francois Lecointe, 1992. "Rachats d'entreprise avec endettement (LBO et MBO) : motivations micro-économiques, effets sur l'efficacité des entreprises et risques macro-économiques," Économie et Prévision, Programme National Persée, pages 89-104.
    3. Richard Cantor & Frank Packer & Kevin Cole, 1997. "Split ratings and the pricing of credit risk," Research Paper 9711, Federal Reserve Bank of New York.

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