ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as Co-Chair, Center for Applied Quantitative Finance, Risk Research and Quantitative Solutions at SAS. Don’s focus at SAS is quantitative finance, credit risk, asset and liability management, and portfolio management for the most sophisticated financial services firms in the world.

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New Version: The Valuation of Corporate Coupon Bonds

10/10/2023 05:06 AM

The Valuation of Corporate Coupon Bonds
Jens Hilscher,  Robert A. Jarrow,  and Donald R. van Deventer
Updated October 12, 2023

Abstract

This paper proposes and estimates a tractable, arbitrage-free valuation model for corporate coupon bonds that includes a more realistic recovery rate process. Most existing studies use a recovery rate process that is misspecified because it includes recovery for coupons due after default. Misspecification errors from assuming recovery on all coupons can be substantial; they increase with recovery rates, coupons, maturity, and default probabilities. For a large sample of market transactions: (i) our model has lower pricing errors than one assuming recovery on all coupons, and (ii) the magnitude of our model’s outperformance is linked to misspecification errors from assuming recovery on coupons.

A copy of the paper is available here:

HJVCouponBondValuation_12Oct2023

ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as Co-Chair, Center for Applied Quantitative Finance, Risk Research and Quantitative Solutions at SAS. Don’s focus at SAS is quantitative finance, credit risk, asset and liability management, and portfolio management for the most sophisticated financial services firms in the world.

Read More

ARCHIVES