Published in:
The Journal of Financial and Quantitative Analysis, 45 (2010) 6, Seite 1517-1547
Language:
English
ISSN:
1756-6916;
0022-1090
Origination:
Footnote:
Description:
<p>Using an extensive cross section of U.S. corporate credit default swaps (CDSs), 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.</p>