Corporate Bond Loss Given Default: A Structural Model
This article provides a structural model in a continuous-time framework to investigate the Loss Given Default (LGD) for corporate bonds. By intro- ducing debtors to the default decision making process, both the debtors and the firm management can liquidate the firm, which makes it a stochastic game. Under the assumptions that there exists a covenant that allows them to liquidate the firm, and that they can also perfectly monitor the status of the firm, the optimizing bondholders need to solve a optimal stopping problem with a non-linear terminal payment. The best liquidation policy is intuitive: either to force liquidation the first time firm value falls to the lowest level that guarantees a full recovery of the bond par value, or never exercise the right. The resulting LGD distribution is therefore bimodal, which agrees with empirical observations. In addition, the model predicts that coupon rates and firm growth rates affect LGDs negatively, while the firm volatility affects LGDs positively. An extension of the basic model where the recovery rates are unobserv- able is studied. It shows that creditor composition of a firm does have an important effect on LGDs, and the effect is consistant with the empirical result from Carey and Gordy (2004).
Zhipeng Zhang
Stanford Graduate School of Business
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）