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Structural recovery of face value at default

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  • Guha, Rajiv
  • Sbuelz, Alessandro
  • Tarelli, Andrea

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 cashflow-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.

Suggested Citation

  • Guha, Rajiv & Sbuelz, Alessandro & Tarelli, Andrea, 2020. "Structural recovery of face value at default," European Journal of Operational Research, Elsevier, vol. 283(3), pages 1148-1171.
    • Handle: RePEc:eee:ejores:v:283:y:2020:i:3:p:1148-1171
    DOI: 10.1016/j.ejor.2019.11.057
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    Cited by:

    1. Zachary Feinstein & Andreas Sojmark, 2020. "Dynamic Default Contagion in Heterogeneous Interbank Systems," Papers 2010.15254, arXiv.org, revised Jul 2021.

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