Implied Recovery Rates—Auctions and Models

Höcht, Stephan; Kunze, Matthias; Scherer, Matthias

doi:10.1007/978-3-319-09114-3_9

Cited by 2 publications

(1 citation statement)

References 14 publications

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“…Default is assumed to instantaneously trigger a credit event of the CDS. The bond is assumed to be a deliverable security in the auction following the CDS trigger event, and the auction process is assumed to yield the same recovery rate R. Although this is an unrealistic assumption in principle (see, e.g., [17]), a negative basis investor can always eliminate recovery risk by delivering his bonds into the auction (physical settlement), in which case he gets compensated by the (nominal-matched) CDS for the nominal loss of the bond. 4 Consequently, our assumption is not severe for the present purpose.…”

Section: General Notationsmentioning

confidence: 99%

Negative Basis Measurement: Finding the Holy Scale

Bernhart¹,

Mai²

2016

Innovations in Derivatives Markets

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Investing into a bond and at the same time buying CDS protection on the same bond is known as buying a basis package. Loosely speaking, if the bond pays more than the CDS protection costs, the position has an allegedly risk-free positive payoff known as "negative basis". However, several different mathematical definitions of the negative basis are present in the literature. The present article introduces an innovative measurement, which is demonstrated to fit better into arbitrage pricing theory than existing approaches. This topic is not only interesting for negative basis investors. It also affects derivative pricing in general, since the negative basis might act as a liquidity spread that contributes as a net funding cost to the value of a transaction; see Morini and Parampolini (Risk, 58-63, 2011, [23]).

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Section: General Notationsmentioning

confidence: 99%

Negative Basis Measurement: Finding the Holy Scale

Bernhart¹,

Mai²

2016

Innovations in Derivatives Markets

View full text Add to dashboard Cite

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Probability Density of Recovery Rate Given Default of a Firm’s Debt and Its Constituent Tranches

Chellathurai¹

2017

Int. J. Theor. Appl. Finan.

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This paper derives the theoretical underpinnings behind the following observed empirical facts in credit risk modeling: The probability of default, the seniority, the thickness of the tranche, the debt cushion, and macroeconomic factors are the important determinants of the conditional probability density function of the recovery rate given default (RGD) of a firm’s debt and its tranches. In a portfolio of debt securities, the conditional probability density functions of the recovery rate given default of tranches have point probability masses near zero and one, and the expected value of the recovery rate given default increases as the seniority or debt cushion increases. The paper derives other results as well, such as the fact that the conditional probability distribution function associated with any senior tranche dominates that of any junior tranche by first-order. The standard deviation of the recovery rate given default of a senior security need not be greater than that of a junior security. It is proved that the expected value of the recovery rate given default need not increase as the proportional thickness of the tranche increases.

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Implied Recovery Rates—Auctions and Models

Cited by 2 publications

References 14 publications

Negative Basis Measurement: Finding the Holy Scale

Negative Basis Measurement: Finding the Holy Scale

Probability Density of Recovery Rate Given Default of a Firm’s Debt and Its Constituent Tranches

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