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- Title
MODELING THE RECOVERY RATE IN A REDUCED FORM MODEL.
- Authors
XIN GUO; JARROW, ROBERT A.; YAN ZENG
- Abstract
This paper provides a model for the recovery rate process in a reduced form model. After default, a firm continues to operate, and the recovery rate is determined by the value of the firm's assets relative to its liabilities. The debt recovers a different magnitude depending upon whether or not the firm enters insolvency and bankruptcy. Although this recovery rate process is similar to that used in a structural model, the reduced form approach is maintained by utilizing information reduction in the sense of Guo, Jarrow, and Zeng. Our model is able to provide analytic expressions for a firm's default intensity, bankruptcy intensity, and zero-coupon bond prices both before and after default.
- Subjects
ECONOMIC models; BUSINESS enterprises; BANKRUPTCY; BOND prices; PRICES; FINANCIAL crises
- Publication
Mathematical Finance, 2009, Vol 19, Issue 1, p73
- ISSN
0960-1627
- Publication type
Article
- DOI
10.1111/j.1467-9965.2008.00358.x