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A Duration Model For Defaultable Bonds

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  • Gady Jacoby

Abstract

I extend recent theoretical work on duration and derive an improved model for the risk‐adjusted duration of corporate bonds. My ex‐ante risk‐adjusted duration is the sum of the bond's Fisher‐Weil duration and the duration of the potential expected delay in recovery caused by the default option. My main conclusion is that failing to adjust duration for default is costly for high‐yield bonds, especially those with a shorter time to maturity. For investment‐grade bonds, this cost is trivial for all maturities.

Suggested Citation

  • Gady Jacoby, 2003. "A Duration Model For Defaultable Bonds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(1), pages 129-146, March.
    • Handle: RePEc:bla:jfnres:v:26:y:2003:i:1:p:129-146
    DOI: 10.1111/1475-6803.00049
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    Cited by:

    1. Xie, Yan Alice & Liu, Sheen & Wu, Chunchi & Anderson, Bing, 2009. "The effects of default and call risk on bond duration," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1700-1708, September.
    2. Jacoby, Gady & Shiller, Ilona, 2005. "Bond elasticity under liquidation risk," Research in International Business and Finance, Elsevier, vol. 19(3), pages 351-364, September.
    3. Kraft, Holger & Munk, Claus, 2007. "Bond durations: Corporates vs. Treasuries," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3720-3741, December.
    4. Chenghsien Tsai, 2009. "The Term Structure of Reserve Durations and the Duration of Aggregate Reserves," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 419-441, June.
    5. Tsai, Ming-Shann & Liao, Szu-Lang & Chiang, Shu-Ling, 2009. "Analyzing yield, duration and convexity of mortgage loans under prepayment and default risks," Journal of Housing Economics, Elsevier, vol. 18(2), pages 92-103, June.
    6. Jacoby, Gady & Roberts, Gordon S., 2003. "Default- and call-adjusted duration for corporate bonds," Journal of Banking & Finance, Elsevier, vol. 27(12), pages 2297-2321, December.
    7. Lee, Hei Wai & Xie, Yan Alice & Yau, Jot, 2011. "The impact of sovereign risk on bond duration: Evidence from Asian sovereign bond markets," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 441-451, June.

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