Management Corp. and used under license by Moody's KMV Company. ACKNOWLEDGEMENTS (2007)
BibTeX
@MISC{Levy07managementcorp.,
author = {Amnon Levy and Zhenya Hu and We Thank To Navneet Arora and Sayan Chakraborty and Ashish Das and Andrew Kaplin and Qi Li and Yashan Wang and Bin Zeng For},
title = {Management Corp. and used under license by Moody's KMV Company. ACKNOWLEDGEMENTS},
year = {2007}
}
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Abstract
This paper proposes a theoretical framework to account for systematic risk in recovery and to address the correlation between the firm’s underlying asset process and recovery. Under the proposed framework, the expected value in default under the risk neutral measure can be expressed as a linear function of the expected value under the physical measure. This allows for a simple mapping between expected recovery observed in the data and a measure that can be applied when using risk neutral valuation methods. When calibrating the model to parameters observed in the data, the risk neutral adjustment results in spreads that are 14% higher for a typical bond, and over 30 % higher in some cases. When validating against market data, the evidence suggests that market spreads reflect systematic risk in recovery. We found that approximately 80 % of our sample was estimated with a lower absolute error when
